Making Lemonade Out of Lemons - Tax Loss Harvesting

Accountant

Has the instability of the stock market got you thinking about what exactly you can do? Now may be this is the perfect time to make your own lemonade. It is wise to consider doing some tax loss harvesting.

But how does this work? Selling securities at a loss can easily offset all your capital gains tax liability. In the long run, your capital losses and gains are netted against one another. All your short-term gains are taxed at your normal income tax rate. Long term gains are in most cases taxed at 15%. In just any year, there is absolutely no limit to the total amount of losses that can be taken to counterbalance the realized gains. You can also remove $3000 of incurred losses against your normal income. Any other remaining losses can simply be carried forward into forthcoming tax years indeterminately. These particular tax loss carry forwards can then be used to either lessen future capital gains or the $3000 of your normal income annually.

This volatile world of the stock market has certainly produced big financial losses for untold hundreds and thousands of investors. Most of them simply accept the fact that they lost their hard earned money. If you are one of those investors, you will definitely be thrilled to know that you do not only have to smirk and bear it. You should know that there are several ways to greatly lessen those losses and in certain cases, convert them into real gains. No, I'm actually not kidding. Here is a great one.

In this case I will use a $6,000 mutual fund investment that has drastically plummeted in value by $1,000. The owner of this money is very uncomfortable with leaving the cash in the account just because he feels the value will continue dropping. Do you think he should sell the shares? Yes. Or should he simply accept the $1,000 loss? No.

Let us assume that the investor is having some other passive income that is earning money, he is eligible for an IRA and that he is in a 30% joint tax bracket. Here is exactly what he may want to consider doing:

Step  1. The initial step is selling the shares; original cost $6,000 for $5,000 leading to a "loss" of $1,000.

Step  2. Realizes the $1,000 loss and immediately write it off on his taxes, in so doing, saving up to $300 (30% tax bracket) in taxes, and therefore greatly reducing the actual dollar loss from $1,000 to $700 only.

Step  3. He then takes the $5,000 that is from the sale of the shares and puts it into his deductible IRA, in that way, earning a $5,000 deduction and greatly reducing his taxable income by that same amount. This will help save 30% of the deductible amount which was $5,000 and result in a savings of $1,500 in taxes.

This amount ($1,500) will now cover the $700 net loss incurred from the sale of the shares and still offer an extra $800 positive effect. That means at the end of this process, by simply using this tactic, we have converted the $1,000 loss into an $800 gain. Well, that is over a 13% return on the original ($6,000) amount. Not bad huh?

And remember this is one of the many ways that an individual can improve their financial status, even in the face of what seems to appear to be very undesirable conditions.

I’m sure you have seen how the tax loss harvesting is normally easier to do with ETFs (Exchanged Traded Funds) and mutual funds (Exchanged Traded Funds) as opposed to individual stocks. Here are some other examples: you can easily buy the Vanguard Health Care Fund (VGHCX) after selling Fidelity Select Health Care (FSPHX), keep similar exposure, and you do not have to wait for thirty days, and incur the loss. You can also buy IYY (Dow Jones U.S. Index Fund) after selling SPY (S&P 500 index). It is highly recommended by tax accountants that you should not sell one index fund and buy a similar index fund offered by a different fund company. It is in fact better to buy a totally different index with the proceeds.

If this is done right and with the help of a tax professional, tax loss harvesting can greatly reduce your tax liability and help you try to uphold the original structure of your portfolio.

Now, I know this must be very hard for you to comprehend and maybe make tax loss harvesting a success. You don’t have to over think about it. As a professional tax  preparer and accountant nothing makes me happier that your success. It is better you equip yourself with the necessary knowledge and that’s exactly what I’m ready to do.  As a business person, nothing will make you excited than the ability to turn around tables and actually rip from your losses. Make an effort today and contact me so that I can simplify for you the steps you need to take to make sure you get the most out of your losses.