The Basics of Tax-Loss Harvesting, Ep #197

We are set to have one of the worst weeks in the stock market in a long time. The stock market was down over 20% the day this podcast was recorded—in bear market territory. We cannot control the market, no matter how much we would like to. But something that we can control—to some extent—is tax-loss harvesting. What is it? How can it help you avoid paying excess taxes? Learn what you need to know in this episode of Best in Wealth.

NOTE: I am not a CPA and this is not formal tax advice but purely informational. Please contact a CPA or reach out to Fortress Planning Group for professional advice.

Outline of This Episode

• [1:11] Can you boycott financial news for 30 days?
• [4:28] So just what is tax-loss harvesting?
• [8:03] Two ways tax-loss harvesting helps manage taxes
• [11:40] Two kinds of gains when you sell investments
• [13:28] Gains and losses in mutual funds
• [15:59] The details on wash-sale rules

So just what is tax-loss harvesting?

Tax-loss harvesting can only be conducted in a taxable account—not a retirement account. You can make as many trades as you want in an IRA and it will not impact your taxes today. But if you have an account other than your retirement accounts, you have to pay taxes on dividends you receive. You are obligated to pay taxes when you sell an investment and have a gain and when a mutual fund sends out a distribution.

Tax-loss harvesting can help you reduce taxes now and in the future. How? Tax-loss harvesting allows you to sell investments when they are down, replace them with something similar (but NOT the same), and offset the gains you might have with the losses you are realizing now. The result? Less money goes to taxes and more stays invested and working for you.

Two ways tax-loss harvesting helps manage taxes

The first way is that losses can be used to offset gains: If you sell an investment and see $10,000 worth of losses, you can buy something similar to stay in the market. But it cannot be the same or you will not see the benefit of the loss. Now you have $10,000 worth of losses on the books. At some point in the year, other investments spit out dividends or gains. If any gains equal $10,000, they can be offset. No taxes for you!

Or, the losses can offset $3,000 worth of income on a joint tax return in one year. If you realized $10,000 worth of losses and you do not have dividends, gains, or profit from sales, you can use $3,000 to offset $3,000 of income from your job or an IRA distribution. The other $7,000? You can carry it into the next year and the next year until it is depleted.

Two kinds of losses when you sell investments

There are short-term losses and long-term losses. Short-term losses are losses you realize from a sale of an investment that you have owned for less than one year. Long-term losses are losses that are realized after selling investments that you have held for more than one year. The rate at which they are taxed is different.

Short-term gains are taxed as income at your regular tax rate. The top margin of federal tax is 37% for high-income earners. The net investment tax income adds 3.8%—adding up to 40.8%. State and local income taxes can put you in tax rates in excess of 50%.

Long-term capital gains tax is significantly lower. If your taxable income is $80,800 or less, you won’t be taxed on long-term capital gains. If you make up to 500,000, the tax is around 15%. If you make above $500,000, long-term gains are taxed at 20%.

How do gains and losses work with distributions from mutual funds? How does the “wash-sale rule” apply? Listen to the whole episode to learn more!

Please note, while you can do tax-loss harvesting yourself, many people who try their hand at tax-loss harvesting do it incorrectly. Tax-loss harvesting needs to be incorporated into your year-round tax planning and investment strategy.

Resources Mentioned

• Best in Wealth Episode #195
• Best in Wealth Episode #196

Connect With Scott Wellens

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Podcast Disclaimer:

The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.

About the author, Scott Wellens

Scott Wellens, CFP® is an investment advisor and founder of Fortress Planning Group. After earning his Bachelor of Science degree from the University of Wisconsin-Oshkosh, Scott quickly ascended to become a Vice President of North American Sales at a major regional provider of telecommunications infrastructure. While financially successful in this role, Scott searched for ways to pursue his passion related to financial literacy and providing financial freedom for both his own family and others. During his search, Scott became curious about the significant gap he found in the financial services sector: he was unable to find a comprehensive financial planner that maintained a family stewardship lens without being attached to financial products. Scott decided to fill that gap by creating his own planning firm that maintains a strong passion for comprehensive, unbiased wealth planning that is genuinely client-centered.

Scott resides in Menomonee Falls, WI with his family. He is the father of three active and independent daughters who keep him on his toes. Scott is an active community member, serving on the Hamilton Education Foundation Board, serves as a Dave Ramsey Financial Peace facilitator and leads the All Pro Dad’s group at their local elementary school. Scott enjoys spending his free time visiting state parks with his family, reading, and watching the Milwaukee Bucks and the Green Bay Packers win ball games.

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