By Ashlee Ogrzewalla, CFP®, Vice President and Manager of Financial Planning & Marketing
The end of the year is a great time to review the individual positions within your investment accounts. Tax loss harvesting is a frequently used strategy to minimize taxes. Whether looking for a good time to rebalance taxable accounts or opportunities to offset capital gains, this strategy has many benefits.
The dos and don’ts below will help maximize this strategy and minimize the amount of capital gains tax due.
Do
- Consider mutual fund investment time horizon for front-end load charges and contingent deferred sales charge (CDSC) or back-end load fees when tax loss harvesting A and C class shares of mutual funds.
- Offset short-term gains (securities bought and sold within one year) with short-term losses.
- Consider using the cash from the sale of the security to help rebalance a portfolio and bring it back to the correct asset allocation.
- Wait 30 days before buying the same (or substantially identical) security to avoid the wash sale rule.
- Look for similar securities you could invest in while avoiding the wash sale rule.
- Remember that an unlimited amount of capital gains can offset capital losses. However, if there are more losses than gains, only $3,000 of capital losses can be realized in a given year. The remaining long-term capital losses must be carried forward and used to offset capital gains in future years.
- Consider a strategy known as “doubling up” to avoid a wash sale. Doubling up entails an increase in the security position that will be sold at least 31 days before you sell the original position. This strategy maintains an investment in the security while allowing for a legitimate tax loss. The last day to double up for 2022 is November 29.
- Talk to your financial advisor about which specific shares to sell to maximize your tax loss benefit.
Don’t
- Buy the security you just sold in one account in another you or an immediate family member own for 30 days, triggering the wash sale rule.
- Repurchase a bond that shares a combination of the issuer, coupon interest rate, and maturity date. At least two of the three must be different to avoid the wash sale rule.
- Leave your dividends set to reinvest in the security you are selling – a dividend that hits the account after you’ve sold the security and reinvests in the security counts as repurchasing the same security within 30 days and triggers the wash sale rule.
- Tackle tax loss harvesting by yourself. Get the help of your financial advisor to ensure you are maximizing the strategy.
- Assume you are selling the lowest-priced shares purchased of the security. The IRS assumes securities are sold in the order of first-in-first-out (FIFO). In other words, the shares sold are those owned for the longest period of time. To avoid FIFO, the seller must identify the specific lot of shares to be sold at the time of sale.