Posted by kdadmin on December 20th, 2017.
One of the most common questions I get as an investment adviser is, “How do I reduce the taxes on my investments?” Yet, oddly, one of the most overlooked strategies is something as lucrative as Tax Loss Harvesting. Here’s how it works …
Briefly tax loss harvesting means reviewing the long term and short term gains and losses in a taxable investment portfolio, and making buys and sells to balance out both the gains and losses not only in the current year, but also against an individual investors tax situation.
The common struggle with tax loss harvesting is knowing how much, and of what type, of an investment, exactly, to sell of a portfolio to maximize the tax loss harvesting benefits without missing a potential uptick in the sold investment. Generally speaking, the steps of tax loss harvesting are:
Missed tax deductions. If an investor has sizable gains or losses in a given year, or has such gains or losses carried over from previous years, and fails to go through the tax loss harvesting exercise, they can leave valuable, and expiring, deductions on the table.
The Wash Sale. This is the most common mistake. The investor must wait 30 days to buy the same investment again, lest the previous sale be disregarded for tax purposes.
Paranoia. For some reason, some people are paranoid about sending their investment adviser their complete tax return. This is one of the most ignorant things they can do. An individual or business tax return is treasure trove of opportunities for the talented adviser that knows how to read it. Simple suggestions like increasing retirement contributions, aggregating medical expenses or charitable contributions to certain years to maximize benefits, or even looking back at capital gains or losses in previous years as a source of tax deductions and savings this year. Don’t miss out on these potential benefits. Empower your adviser with the most complete copy of your tax return as soon as it’s complete.
Procrastination. Most people will avoid that which they don’t understand, until a deadline forces their hand. Waiting until New Year’s Eve to do tax loss harvesting would be like waiting to learn how to to close the railroad bridge in the photo above until the train was already on its tracks. That likely wouldn’t end well… The best time to start planning for tax loss harvesting is immediately after you finish your previous year’s tax return.
Simply navigating taxation, not to mention the all the choices inherent on a return, can be an arduous and complex process. In fact, it can often make the tax loss harvesting analysis so challenging that many people don’t even try to do it, missing key financial opportunities. Enlisting the support of a professional can be particularly useful in this area. Though I’m not a CPA and do not provide tax advice, I regularly employ the strategies listed above to try to improve my clients’ financial results.
After all, your life and financial goals are probably not to become an expert in taxation, regulation, and retirement planning complexities. You’re probably much more interested in saving enough money to one day be able to Live the Life You Love.
I captured this photo of an old railroad bridge while cruising the St.Croix River with some friends, just north of the Afton, Minnesota. Thanks to W.F. and C.F. for the opportunity!