Strategies for Tax-Loss Harvesting

Tax-loss harvesting, or TLH, is a strategy that has been around for a while but may be somewhat misunderstood. In essence, it is the practice of minimizing capital gains tax on investments by offsetting gains and losses, while staying invested in the market.

The process can be more complicated in practice, so let’s look at how it can help you this year.

What is tax loss harvesting?

Investing comprises of many strategies to optimize your profit. The whole point of investing is to make money, and tax loss harvesting helps achieve that goal with a two-fold approach.

  • Certain assets are sold for a loss in order to offset capital gains taxes on assets that have appreciated and are sold.
  • Tax loss harvesting can be used to offset up to $3,000 in taxable income.

The process looks a little something like this:

An asset that is losing value is sold in order to offset the winnings of a greater asset. In order to maintain the status quo of risk and return on the portfolio, another similar asset is bought to replace the asset that had a loss. The IRS has put in stipulations for the buying and selling of investments to a 30-day window, so it is important to know that after you sell an asset, you cannot buy it (or a virtually similar one) back right away.  In fact the timeframe is 30 days, purchasing again no sooner than 31 days. If this is not adhered to, the loss is considered a “wash sale” and the losses are rolled into the cost of the newly purchased equity. There are ways to replace the sold asset sooner, but specific rules apply.

Since the practice involves eliminating taxes, you can only use this strategy on taxable investment accounts, not tax-deferred accounts like a traditional IRA or 401(k).

Your financial advisor can help identify good candidates for these transactions.

The Effects of the Tax Cuts and Jobs Act

The new Tax Cuts and Jobs Act (TCJA) has changed the way that many families will file their taxes. One of the biggest changes is the increase of the standard deduction to $12,000 if filing single and $24,000 if filing jointly (plus additional deductions if over age 65). With the new threshold for standard deductions, financial analysts are thinking through creative strategies to help give you tax breaks.

Below I have outlined methods for you to consider that can provide guidance for reducing your tax bill this year.

Bundling charitable contributions over multiple years into one year.

  • Consider bundling your charitable contributions to surpass the standard deduction threshold in order to itemize one year, and take the standard deduction the next.

Plan to take the standard deduction and strategize about lost deductions.

  • Under the TCJA, state, local, and property tax deductions are limited to $10,000.

The repeal of the Pease Limitation.

  • It is time to take a look at the gains of your itemized deductions since you do not have to worry about the stipulations in the Pease limitation. In the past, if your adjusted gross income exceeded $150,000, your deductions were limited and that is not necessarily the case due to its repeal.

New regulations for Alternative Minimum Tax.

  • The TCJA raised the income limit for 2018-2025 which will help many upper-middle-class taxpayers. The exemption limit for those filing single is $70,300 and those who are married and filing jointly the limit is $109,400.

Healthcare change.

  • The new tax bill eliminates a penalty for those who do not have healthcare coverage.

These changes will affect the way you do taxes this year. Be aware that these items must be implemented before December 31 for any 2018 benefits, however, it’s not too soon to start planning for future years under this new law. Wood Smith Advisors can help, contact us if you’d like to create a strategy.

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.

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