Updated: Jun 5
Tax-loss harvesting is a popular strategy, but it’s not always clear whether it’s the right strategy for our client’s needs.
With this checklist, we are better prepared to help our clients determine whether harvesting capital losses is appropriate for their financial situation.
This checklist covers some key issues to consider when a client and/or advisor are thinking of implementing a tax-loss harvesting strategy, such as:
The effect harvesting losses may have on your overall portfolio goals.
Some common pitfalls and rules to be aware of when harvesting losses.
The potential tax benefits and consequences that may arise.
How long-term goals may be affected by tax-loss harvesting.
In times of market volatility and fluctuating investment values, it is essential to explore strategies that can help mitigate losses and optimize tax benefits. One popular approach is tax loss harvesting, a technique that involves strategically selling investments to offset capital gains and reduce tax liabilities. However, before diving into this strategy, it is crucial to understand its implications, potential pitfalls, and suitability for individual financial situations. In this blog post, we will explore the key aspects of tax loss harvesting and provide a checklist to help investors navigate this complex strategy effectively.
Understanding the Context:
At Gateway Financial, we recognize that market corrections and fluctuations are normal occurrences. Historical events like the dot-com crash and the 2008-2009 financial crisis serve as valuable lessons for investors. While it is essential to learn from the past, it is equally important to understand that history is not always indicative of the future. Nevertheless, by examining past trends, we can glean insights to better prepare for the future.
Evaluating Portfolio Allocation and Risk Tolerance: Before considering tax loss harvesting, investors must review their portfolio's asset allocation and assess their risk tolerance. Conducting periodic check-ins and understanding personal emotions regarding financial goals and market sentiment are crucial in determining the suitability of this strategy.
Assessing Realized Gains and Losses: A thorough assessment of realized gains and losses is necessary to gain a clear picture of one's investment performance. By understanding past gains and losses, investors can make informed decisions and develop a future plan.
Capital Gains and Anticipated Changes in Tax Rates: Consideration of current tax brackets and the potential for future changes is vital. Awareness of the 2017 Tax Cuts and Jobs Act, set to expire in 2025, can help evaluate the impact of tax loss harvesting on income and future tax brackets.
Aligning Tax Loss Harvesting with Overall Tax Planning Goals: It is crucial to evaluate how harvesting losses may complement other tax planning goals, such as managing adjusted gross income (AGI) and modified adjusted gross income (MAGI). Ignoring factors like the Income-Related Monthly Adjustment Amount (IRMAA) can have unintended consequences, such as increased Medicare premiums or tax liabilities.
Reinvesting Tax Savings and Future Planning: Having a plan in place for reinvesting tax savings is essential for long-term financial growth. Investors can choose to reinvest savings for future portfolio growth, make additional contributions, or adjust distributions based on individual financial goals.
Understanding State-Specific Rules: Tax regulations vary across different states, and it is important to be aware of the specific rules governing tax loss harvesting in your state of residence. Understanding these rules will help optimize the benefits of this strategy while avoiding any potential pitfalls.
Considering Long-Term Goals, Charitable Donations, and Inheritance: For investors with long-term objectives, understanding how tax loss harvesting impacts charitable donations and inheritance planning is crucial. Donating securities to charity can provide tax benefits by reducing the tax basis, while gifting securities at a loss to heirs can be advantageous, as the lower cost basis will not affect them.
Implementing Tax Loss Harvesting Effectively: To successfully implement tax loss harvesting, investors need to consider various factors. Avoiding wash sale rules, reviewing capital gains netting rules, and assessing administrative and trading costs are key implementation issues that should not be overlooked.
Tax loss harvesting can be a valuable strategy for investors seeking to manage tax liabilities and optimize their portfolios. However, it is crucial to understand the intricacies involved and seek professional guidance when necessary. At Gateway Financial, we emphasize comprehensive tax planning and help clients navigate the complexities of tax loss harvesting to maximize their financial