Implementing strategies to reduce tax obligations can significantly enhance after-tax investment returns. One effective method is tax loss harvesting, which involves selling securities at a loss to offset capital gains in your taxable (non-qualified) investment accounts.
If your realized losses exceed your gains for the tax year, you can use those losses to offset your gains and potentially reduce your taxable income. Here are the key points to consider:
- Offsetting Gains: You can apply your capital losses to offset any capital gains you have realized during the year. This can help lower your overall taxable income.
- Deducting Excess Losses: If your capital losses exceed your capital gains, you can deduct the excess loss from your ordinary income up to a limit of $3,000 per year (or $1,500 if you are married and filing separately).
- Carrying Over Losses: If your total net capital loss exceeds the limit you can deduct in one year, you can carry over the unused portion to the next year and treat it as if you incurred it in that subsequent year.
Trades must be completed by December 31st of the tax filing year to effectively use tax loss harvesting. However, it's important to be aware of the "wash-sale" rule, which prevents you from claiming a loss if you repurchase the same or a substantially identical security within 30 days.
If you have any questions about your investment accounts, whether they are under our management, managed by yourself, or handled by another advisor, please call our office to schedule a time to discuss.