Tax-Loss Harvesting Offers Chance at Silver Lining

Posted on 11-28-2023

This week, Craig Siminski, of CMS Retirement Income Planning, shares with us an article discussing     how selling losing investments may offer the potential to reduce an investor’s tax liability:

Stock market downturns can be rough on your portfolio’s bottom line, but they may also offer the potential to reduce your tax liability and possibly buy shares at a discount. When an investment loses money, it’s often best to look beyond momentary price swings and hold it for the long term. Sometimes, though, you may want to sell a losing investment, which could help offset gains from selling an investment that has appreciated or reduce your taxable income even if you do not have gains.

Whether this strategy — called tax-loss harvesting — is appropriate for you depends on a variety of factors, including your current portfolio performance, your long-term goals, and your current and future taxable income. Keep in mind that capital gains and losses apply only when investments are sold in a taxable account.

Gains and Losses

Capital gains and losses are classified as long term if the investment was held for more than one year, and short term if it was held for one year or less. Long-term gains are taxed at a rate of 0%, 15%, or 20% depending on your income. Short-term gains are taxed at your ordinary income tax rate, which may be much higher than your capital gains rate.

High-income taxpayers (with modified adjusted gross income above $200,000 for single filers or $250,000 for joint filers) may also be subject to a 3.8% net investment income tax.

For tax purposes, capital losses are applied first to like capital gains and then to the other type of gains; for example, long-term losses are applied first to long-term gains and then to short-term gains.

Up to $3,000 of any remaining losses can then be applied to your ordinary income for the current year ($1,500 if you are married filing separately). Finally, any remaining losses can be…

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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 25 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.

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