By Ashlee Ogrzewalla, CFP®, CFDA®, Vice President and Manager of Financial Planning & Marketing
If your portfolio has any securities at an unrealized loss, tax-loss harvesting in this strong equity market of 2024 can be a powerful tool for mitigating capital gains taxes and enhancing after-tax returns. This popular tax-minimization strategy allows investors to sell losing investments and use those losses to offset gains or reduce taxable income. The end of the year is an ideal time to review the individual positions in your portfolio and implement these tax-smart moves.
Whether seeking opportunities to rebalance your taxable accounts or offset capital gains, tax-loss harvesting can offer meaningful financial benefits. However, as with any strategy, careful execution is essential. Below are updated dos and don’ts to help you maximize this strategy in 2024 and avoid costly mistakes.
Do
- Account for Investment Costs: When tax-loss harvesting mutual funds, consider the time horizon and any front-end load charges or contingent deferred sales charges associated with A and C class shares.
- Offset Short-Term Gains Strategically: Use short-term losses to offset short-term gains (securities held for one year or less), as these are typically taxed at higher rates.
- Rebalance Your Portfolio: Use proceeds from selling underperforming securities to rebalance your portfolio and align it with your financial goals.
- Observe the Wash Sale Rule: Wait at least 30 days before repurchasing the same or substantially identical security to avoid disallowed losses.
- Explore Alternative Investments: Seek similar, non-identical securities to invest in while adhering to the wash sale rule.
- Understand Loss Limitations: Remember, while you can offset unlimited capital gains with losses, only $3,000 in net capital losses can be deducted against other income in a single year. Any excess losses must be carried forward and used to offset capital gains in future tax years.
- Consult a Financial Advisor: Work with your financial advisor to identify the most tax-advantageous shares to sell.
Don’t
- Trigger the Wash Sale Rule: Avoid repurchasing the same security in any accounts you or an immediate family member owns within 30 days.
- Repurchase Bonds with Identical Features: Bonds sharing the same issuer, coupon interest rate, and maturity date are considered identical. At least two of these attributes must differ to avoid a wash sale.
- Reinvest Dividends Automatically: A dividend that hits the account after you’ve sold the security and reinvests counts as repurchasing the same security within 30 days and triggers the wash sale rule. Adjust dividend reinvestment settings before selling.
- Do It Alone: Tax-loss harvesting can be complex. Consult with your financial advisor to ensure you are maximizing the strategy.
- Ignore Lot Identification Rules: Unless you specify otherwise, the IRS assumes a first-in-first-out (FIFO) method when selling securities. To avoid FIFO and maximize tax benefits, the seller must identify the specific lot of shares to be sold at the time of sale.
Engaging your trusted financial professionals this time of year can help you determine the most effective ways to manage gains and losses in your portfolio. While no one enjoys seeing losses, tax-loss harvesting allows you to turn them into strategic opportunities. Take the time to evaluate your portfolio and make the most of this smart tax-planning strategy before the year’s end.
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.