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Your Investment Portfolio May Contain a Hidden Cache: Realizing Bountiful Tax Benefits Through Systematic and Continuous Tax Loss Harvesting

    It’s that time of year! The holidays are upon us! A time for turkeys, holiday gifts and tax loss harvesting!

    Yes, that’s right tax loss harvesting.  Let’s delve into this hidden tax planning gem!

    A Quick Primer on Tax Loss Harvesting

    Tax loss harvesting is simply reviewing your security portfolio to identify securities in a loss position and determining whether to sell it to generate a capital loss to offset present or future capital gains and up to $3,000 of ordinary income.  You can then reinvest the sales proceeds to reacquire different securities that meet your asset-allocation strategy.

    A New Year’s Resolution to Harvest More Often

    In addition to New Year’s resolutions of exercising more, or cleaning out that one closet you’ve been avoiding, consider adding calendar reminders to work with your investment adviser to regularly analyze your portfolio for tax loss candidates throughout the year.  This expands the population of potential tax loss positions from just one or two months at year-end to all 12 months. 

    Create an Inventory of Tax Losses for Future Use

    Non-corporate taxpayers (individuals, estates and trusts) can carry forward capital losses indefinitely (after offsetting up to $3,000 against ordinary income in a particular year).  This unlimited carryover allows for the accumulation of capital losses as part of a planned strategy to have a cache of capital losses available to offset against planned or unplanned future capital gain.

    Tax Rate Arbitrage

    Short-term capital gains are taxed at the higher ordinary income tax rates (in 2024 the highest ordinary tax rate is 37% compared to the highest capital gain rate of 20% – the additional 3.8% net investment tax rate reduces this differential), and consequently, if there are short-term capital gains available to offset, a greater tax benefit can be realized.  This factor can be integrated in an overall tax loss harvesting strategy.

    Another arbitrage consideration involves the long-term capital gain rate relationship with other income items.  That is, the long-term capital gain rates can range from 0 to 20% depending on the other income items (i.e., other than the capital gain items).  In general, the higher the Adjusted Gross Income, the higher the long-term capital gain rate up to 20%.  For example, an individual’s long-term capital gain rate tends to be higher while an individual is working when compared to retirement.  Accelerating losses to pre-retirement years can be advantageous from this perspective.

    One caveat to the above, if the alternative minimum tax (AMT) applies to your situation, some of the benefits discussed above may be reduced or eliminated.  Your tax adviser can run modeling computations to determine the impact of the AMT.

    If you have any questions on tax loss harvesting strategies, please contact our firm to discuss further.  Until then, Happy Holidays!

    Author: Tom Alvarez C.P.A.; M.B.T.