How To Use Tax Harvesting Before Year End To Lower Your Taxes

As we approach year’s end, now may be the time to see if tax-loss harvesting could help you lower your 2023 taxes. If you have turned on the TV or followed the news, you likely know that pretty much all parts of the stock market were down in 2022.

For its part, 2023 has also been quite volatile, even though many people have seen some decent returns across their investment accounts. Even if your portfolio has gone up gangbusters over the years, you may have a few losers in the bunch, or perhaps shares of one of your big winners are currently worth less than you paid for them. Implementing a tax-loss harvesting strategy can help you reduce your overall tax bill or, at the very least, minimize the taxes on your investment gains.

The Limits Of Tax-Loss Harvesting

Each year, your investment gains and losses will be netted against each other to determine your taxable gains. Capital gains are split into short-term gains (shares held less than a year) and long-term gains (held longer than a year). You can deduct up to $3,000 against your regular income if you have more short-term losses than gains. Any remaining losses beyond this amount can be carried forward to future years.

This only applies to your non-retirement account. Taxes are deferred on accounts like a 401(k), traditional IRA, or Roth IRA. You will only owe taxes once you begin taking withdrawals.

Regarding state taxes, tax-loss harvesting rules will vary depending on where you live—for example, California taxes capital gains as regular income. So, as a Los Angeles Financial Planner, tax-loss harvesting can be extremely valuable for my California tax-planning clients. California has the highest marginal tax bracket, topping out at 13.3%. If you live in a high-tax state, you want to make sure that your financial advisor is also providing tax planning. The tax savings are just too big to ignore.

Tax-Loss Harvesting And Wash Sale Rules

While tax harvesting can be a bit time-consuming, for the most part, it is pretty easy to implement, especially if you have a fiduciary financial planner to help you and/or your investment account offers free trading. In the past, transaction cost often meant that tax-loss harvesting was most beneficial for wealthier investors. Without the heavy drag of trading costs, even smaller investors can save a few dollars on taxes yearly with tax-loss harvesting.

The main way people get tripped up with implementing tax harvesting is the wash sale rule. The wash sale rule prohibits investors from selling an investment for less and then rebuying the same or “substantially identical” investment within 30 days before or after the sale for a loss. If you don’t follow the wash sale rules, you can lose the tax benefits of your tax-loss harvesting sale.

Tax-Loss Harvesting Can Be Done Throughout The Year

Although I am writing about tax-loss harvesting as the year’s end approaches, you can make tax-loss harvesting transactions anytime during the year. The tax benefits of tax-loss harvesting are typically the most valuable when there is a significant drop in the stock market, as we saw over the past few months. Hopefully, you are working with an amazing financial advisor who offers proactive tax planning; they will hopefullyu take care of tax-loss harvesting for you. You’ll get the tax benefits when you file your taxes next year, and you won’t have to think about it. If you aren’t sure your financial advisor is doing tax-loss harvesting for you, ask.

Shouldn’t You Buy Stocks Low And Sell High?

If every investment only went up, stock market returns would be much lower than they have been historically. Even if you have an amazing portfolio and great timing, the value of your investments will still fluctuate. While buying low and selling high is the overall goal when investing, selling some shares to realize tax savings may make selling investments that have dropped in value a smart move. For example, if you owned 1,000 shares of Apple
AAPL
stock, you could sell the 100 shares that were worth less than you paid. You would keep most of your investment in Apple stock while getting some tax savings. Also, you could buy another 100 shares in 31 days if you wanted.

Tax-loss harvesting has been around and used by the ultra-wealthy for quite some time. Technology and reduced trading costs have made this tax-minimization strategy easier to implement and much less time-consuming and costly. Tax-loss harvesting can help boost your net after-tax investment returns without taking on more risk. Who doesn’t love saving money on taxes?