Today’s year-end planning tip is regarding Tax loss harvesting.
Tax Loss Harvesting is the process of selling securities at a loss to offset a capital gains tax liability and it’s worth considering before year-end.
When reviewing your portfolio you should determine if there are opportunities to strategically generate losses to offset other gains. For example, using a tax-swap strategy for mutual fund holdings allows you to realize a tax loss while retaining essentially equivalent market exposure. The key is that the funds are not “substantially identical.” The way around that is by using different fund companies, that track different indices, and may have a slightly different strategy, but that still have similar results. A common example is swapping out an S&P 500 fund at one company and buying a total US market index fund at another fund family.
One thing to be mindful of is Minimizing short-term capital gains: This strategy may be used to limit the recognition of short-term capital gains, which are generally taxed at a higher federal income tax rate than long-term capital gains.
One creative approach to tax loss harvesting is to Donate cash proceeds from the sale of stocks that are at a loss: In this strategy, investors benefit from recognizing a loss by selling a stock that went down in value. The loss can be used to offset any capital gains for the year, or it can be used to offset up to $3,000 of your ordinary income. That is in addition to the charitable deduction you receive for your cash donation from the proceeds of this sale.