By Ashlee Ogrzewalla, CFP®, FBS®, CFDA®, Vice President and Manager of Financial Planning & Marketing
Print This Post
Thoughtful year-end planning can help you keep more of what you earn and improve the long-term health of your portfolio. As the year comes to a close, this is a great time to take a fresh look at your investments and your tax picture. One strategy that can make a significant difference is tax-loss harvesting. Tax-loss harvesting is a straightforward way to utilize certain investment losses to help reduce the taxes you owe on gains.
Even in a year when the overall market performs well, some individual investments may still be down. Instead of ignoring those positions, tax-loss harvesting allows you to put them to work for you.
Here’s how it can help, along with some key considerations to keep in mind.
What Tax-Loss Harvesting Does
When you sell an investment that’s gone down in value, that loss can be used to offset gains you’ve realized elsewhere in your portfolio. Think of it as smoothing out the bumps and reducing the tax bill that comes from your profitable investments.
If your losses are larger than your gains, up to $3,000 can also be used to reduce other taxable income. Anything beyond that carries forward to future years.
When It Makes Sense
- If you’ve realized gains this year
- If you’re planning to rebalance your portfolio
- If you’d like to make your tax picture more efficient over time
The end of the year is a natural checkpoint to evaluate whether this strategy fits your situation.
A Few Important Rules
There’s one rule you definitely want to avoid breaking: the wash-sale rule.
If you sell an investment for a loss and then buy the same or a “substantially identical” investment within 30 days before or after the sale, the IRS won’t allow the loss. For example, selling an S&P 500 mutual fund and immediately buying an S&P 500 ETF from a different company can still count as a wash sale, because both track the same index. The same applies if you sell a stock at a loss but your spouse buys that same stock in their IRA within 30 days. Even automatic dividend reinvestments can trigger this rule.
Why Work With Your Advisor
Tax-loss harvesting is most effective when it fits into a comprehensive financial plan. It’s not just about selling something that’s down; it’s about making sure each step supports your long-term goals and stays within IRS rules.
Your advisor can help you:
- Spot the right opportunities
- Choose which shares to sell
- Avoid wash-sale mistakes
- Reinforce your overall investment strategy
No one enjoys seeing losses, but this strategy turns those losses into something useful. Tax-loss harvesting may be a worthwhile consideration if your goal is to lower taxes and enhance your portfolio’s long-term efficiency.
As we approach year-end, it’s a perfect time to review your accounts with your financial advisor. A little planning today can yield significant benefits in the years ahead.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.