Tax-Loss Harvesting: It’s Never Too Late

Tax-loss harvesting is a tax move that can help with your income tax burden when you’ve experienced a loss with your investments.  Briefly, this is where you have a taxable account, holding stocks, bonds, or mutual funds and the market declines leaving your holdings in a loss situation.  Once you sell the holding, you have realized the loss, which enables you to take advantage of the tax laws and deduct those losses, first against any gains in your account(s), and then at a rate of $3,000 per year against ordinary income.

Photo credit: nan

This is similar to the famous move that Mr. Trump (and I would be shocked if Mrs. Clinton never took a loss against future taxes) used to avoid future income taxes. This was recently discovered in Trump’s tax records and made out to be a fatcat loophole – at least by the media – when actually anyone can take advantage of it. In fact, it’s likely that if you have non-IRA investments you’ve probably taken advantage of this rule yourself.

As an example, say you purchased a mutual fund for $10,000 last year.  Over the course of this year, your mutual fund’s value reduced to $5,000.  If you sold the holding, you would have a loss of $5,000.  Using the tax law to your benefit, you are able to reduce your ordinary income by $3,000 for the current year and carry over the remaining $2,000 for writing off against the following year’s income.

It is important to note that the loss is first used to offset any capital gains you may have realized before you can use it to reduce ordinary income. Continuing the example, if you also sold investments in the current year that had capital gains of $2,600, your net capital loss for the year would be $2,400 ($5,000 minus $2,600). This would allow you to take the capital gains with zero taxes (just like Donald!) and also reduce your ordinary (wage) income by the remaining $2,400 of net capital loss.

Tax-loss harvesting is the action of realizing a loss in order to utilize the loss as a reduction against your other gains and ordinary income. You may not have chosen to sell the losing investment at that particular time for any other reason, but the benefit of tax-loss harvesting caused you to take the action.

The good news is that you can sell any loss positions (and let’s face it, who doesn’t have a loss position?) that you currently hold and then take this reduction of up to $3,000 in ordinary income for your current year’s taxes, which you’ll file next April.  It’ll be a nice surprise for you (if you’ve forgotten about it) when you get ready to file.

Not available to an IRA

This is one of the many benefits of holding at least a portion of your investments in non-qualified or non-IRA accounts.  Because in your IRA or 401(k) plan, losses you sustain are of no tax consequence.  Likewise, gains that you experience, along with the funds that you “hid” from taxes in earlier years, will be taxed at ordinary income tax rates – which are presently higher than the capital gains rates assessed against your taxable account gains.  And I don’t expect that the ordinary income tax rates are set to decline appreciably at any time in the near future, given the deficit spending being introduced at an alarming pace these days.