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Practical Planning Tip: Year-end Tax-loss Harvesting

December 15, 2023

Today’s year-end planning tip will cover Tax loss harvesting.

Tax-loss harvesting is the process of selling securities at a loss to offset a capital gains tax liability.

When reviewing investment portfolios, 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.” Ways around that are using different fund companies, that track different indices, and may have a slightly different strategy, but that STILL has 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.

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.

Donate cash proceeds from the sale of stocks that are at a loss: This is particularly relevant in a year like 2023 when some areas of the stock market have fell in value. 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.

Planning Tip: that I always share with CPAs that I collaborate with, which is…Remember, it’s generally a poor decision to sell an investment, even one with a loss, SOLEY for tax reasons. There must be an investment strategy behind the sale. As I say frequently to tax conscious investors: “Don’t let the tax tail wag the investment dog.”

´╗┐You can watch the FULL video here.