Investing with a Tax Focus by Implementing a Tax-Loss Harvesting Strategy

In Asset Allocation, Investments, Personal Financial Planning, Tax by Chip Hymiller

With the end of the year quickly approaching, now is the time to consider making investment adjustments in your portfolio that could have a meaningful impact on your portfolio’s tax-adjusted return.

Though tax considerations shouldn’t be the primary driver of your investment decisions, there are steps that can be taken before the end of the year that can effectively reduce your taxes.  “Tax loss harvesting” is the process of offsetting (taxable) investment gains with investment losses in order to minimize the impact of capital gains taxes.

Should you have unrealized losses in your personal investment portfolio (not retirement accounts), it may be a good time to sell those positions and reinvest the proceeds in another investment. Doing so, can serve to offset any realized capital gains that your portfolio has produced and reduce your overall tax liability.

Realized investment losses that exceed realized gains can also be used to offset up to $3,000 of ordinary income ($1,500 for a married person filing separately).  Any unused losses are carried forward to reduce your taxes in future years.

Example:  You sold shares in ABC fund this year realizing a $2,500 gain/profit in this investment.  In order to offset your taxable gains in ABC fund, you decide to sell the XYZ fund at a $7,000 loss.  Executing these trades in the same year, results in offsetting the $2,500 capital gain from ABC fund.  You are then left with a $4,500 loss.  You are able to further utilize this $4,500 loss to offset $3,000 of ordinary income tax this year, and carry forward the remaining $1,500 to be applied in future tax years.

When employing an effective tax loss harvesting strategy, it is important to point out that although you are selling an investment to realize (or harvest) the tax loss, you are then utilizing the proceeds to buy a similar investment.  Therefore, your optimal stock/bond mix is maintained.

You may want to check out the following video where Chip Hymiller provides a brief explanation of ways in which Beacon helps clients optimize their portfolio’s long term tax-efficiency and thereby increasing after-tax returns.