Happy Tax Day! A special edition post on the popular investment related topic around tax time, Tax-Loss Harvesting! So what is tax-loss harvesting and how does it work? Each year taxpayers may want to recognize at least $3,000 per year in net capital losses, if they have them in their portfolios. The effort to time one’s recognition of capital gains and losses is called tax-loss harvesting. The savings from a net capital loss equal the taxpayer’s marginal tax rate times the amount of the loss.
For Example
A taxpayer in the 28% tax bracket who takes the full $3,000 capital loss will save $840 in taxes. $3,000 x 28% = $840. Obviously, it would be better to have no capital losses.
Advantages of Tax-Loss Harvesting
1) Savings of income taxes if loss is written off against ordinary income
2) Capital losses allow the investor to take capital gains without paying taxes
3) Opportunity for investor to rebalance their investment portfolio (this applies if there is a target asset allocation associated with the portfolio)
When would Tax-Loss Harvesting not work for an investor?
1) If the investor constantly picks winning investments and does not have any losses in their portfolio
2) If there has been a long bull market run and there are no losses in the portfolio for the investor to sell in order to create a capital loss
If you are unsure of your own investment strategies or if you are looking for a second opinion of your current wealth accumulation plan, schedule a meeting today for a review to make sure you are heading in the right direction.
This website is for informational purposes only and is not intended to be specific advice or recommendations. For specific advice or recommendations you would need to meet directly with one of our advisers.