The market has experienced dramatic highs and lows over the course of this year. However, this volatility does not come without the potential for some opportunities. And in fact, it can provide the opportunity for tax-loss harvesting. Tax-loss harvesting can allow you to lower your tax liability and may have other benefits for your portfolio. Here’s how it works.
What is tax-loss harvesting?
Tax-loss harvesting is a method of realizing losses on currently underperforming investments to offset taxable gains on other investments – either in the current year or in future years. To begin, we review portfolios for an investment that is underperforming . That investment can then be sold (yes, even at a loss) and the proceeds reinvested into an investment with greater future potential in the current economic and market environment. This purchase should meet both your financial planning and investment strategy.
How do you know which stocks are underperforming?
As part of our investment strategy, we evaluate your long-term goals and risk tolerance. With this plan in place, we regularly review your investments. As we near year end, we look strategically at the positions in your taxable accounts to determine if the sale of any positions with a current loss could be utilized to provide tax relief. Schwab points out an important rule to keep in mind: “if you sell a security at a loss and buy the same or a “substantially identical” security within 30 days before or after the sale, the loss is typically disallowed for current income tax purposes.” This rule, known as the Wash Sale Rule, requires an investor to wait 31 days before repurchasing a particular stock to take advantage of the tax loss.
How does the sale of investments balance out for tax-loss harvesting?
Tax-loss harvesting can be used to balance the sale of underperforming stocks against other stocks that have been sold subject to capital gains tax. “If your losses are larger than the gains, you can use the remaining losses to offset up to $3,000 of your ordinary taxable income,” Schwab explains. If the difference is more than $3,000, you can use that in future tax years.
The sale of investments can also rebalance your portfolio.
The other benefit of tax-loss harvesting is that it can aid in the rebalance of your investments. Over time a chosen asset allocation strategy may become unbalanced due to market value fluctuations. Although we cannot predict with certainty short term market movements, our expertise and use of technology help us evaluate the markets and strategically plan your investments accordingly.
Are there scenarios when I can’t use tax-loss harvesting?
Yes. Retirement accounts are not able to take advantage of this technique. Tax-loss harvesting is not useful with a 401(k) or IRA because the losses generated in a tax-deferred account cannot be deducted. Schwab also points out that tax regulations place restrictions on what losses can be used to offset. Long-term losses initially offset long-term gains, while short-term losses are used to offset short term gains. These overall net of long term gain/loss is then netted against the short term net gain/loss to determine the potential for tax deduction and/or loss carry forward.
While this can seem complex, we work with you to explain all aspects of your financial planning clearly, including this strategy. If you have any questions about tax-loss harvesting or your investments, don’t hesitate to reach out to our team.
Marshall Financial Group is a SEC registered investment adviser. Information presented is for educational purposes only and for a broad audience. The information does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Marshall Financial Group has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment or client experience. Marshall Financial Group has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments or client experiences. Please refer to https://adviserinfo.sec.gov/ for Marshall Financial Group’s ADV Part 2A for material risks disclosures. Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. Marshall Financial Group has presented information in a fair and balanced manner.