Updated: Oct 27
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.
[Music] Hi Todd Pouliot Gateway Financial visit us atmygatewaymoney.com. I got a great video today and the reason why you're watching this video is because you've seen some of your statements lose value this year. And this is a common occurrence. It happens it's normal we see this happen time and time and time again. If you're well-seasoned in this industry you remember these times. You remember the .com crash, you remember the crash of 08-09. The financial crisis that we had and we are seeing a world that is in flux. Again, this is normal because we do need corrections in the market and what is abnormal is how some people deal with what's going to happen. Now we always want to look at the past to learn from the past. it is indicative of the Future? No, but we can learn valuable lessons through history. So visit us at mygatewaymoney.com reach out to us connect with us we may be able to help you a little bit through these trying times. But, I wanted to talk about how tax loss harvesting and how it's become such a popular strategy but it's not always very clear that it's the right strategy for our client's needs. So, this checklist helps us be better prepared to have these discussions with our clients and harvesting capital losses and is it appropriate for your financial situation. So in this checklist, we're going to cover four main areas that affect harvesting losses may have on your overall portfolio goals, common pitfalls and rules to be aware of, potential tax benefits, and consequences that may arise. Again you always hear me talk about tax planning, not just tax preparation, we need a plan for what's going to happen and long-term goals that may be affected by tax loss harvesting. So here we are sharing our screen as we always do we want to look at these General issues first. Do you need to review your portfolio's asset allocation and your risk tolerance prior to doing any tax loss harvesting? I really hope you're going to check yes otherwise we really don't need to watch this video. However, understanding the quarterly check-ins that we send our clients that keeps them up to date. How do you feel about the market how do you feel about your financial future? Those are two questions that talk about the emotions of money not the spreadsheet of money. We need to understand how we look at our portfolio asset allocation and our risk tolerance. Before you do anything understand where you're at and also where you want to go because that road map will lead you there. Do you currently have realized gains or losses? So these are really good to figure out what you would actually have. Understand what has happened before you make a plan for the future and in the near future are you planning to sell an asset home or a business and will that be subject to capital gains? Having a CPA an accountant or an enrolled agent around to go through these discussions is really important. That's why I always stress to people we do not work with you until we see your 1040. So we want to look at some of the rules when you're selling some major assets. So I've already talked about tax but let's get into tax. Are you in the zero percent capital gains tax bracket? Now, remember I've got my chart over here on this side that number is very low. Be careful you are dealing with this zero percent tax bracket for capital gains. Do you anticipate your tax rate to change in the future? What a great conversation to have about the 2017 (TCJA) tax cuts and jobs act that is going to sunset in 2025. Whether or not anything happens prior to that we do know that there is an end to that tax cuts and job act. Look at the extra income you might get from tax loss to harvesting and also the cost basis and any extra income from selling those Securities in the future that it may push you into a higher tax bracket. That is very very good tax planning 101. Do you need to review whether harvesting losses may complement other tax planning goals you have? Whether harvesting losses may enable keep your income low enough for any AGI (adjusted gross income) or modified adjusted gross income. Make sure you understand this area. Most people do not understand this area and most people I would tell you are kind of aloof and I'm including those tax preparers I was talking about. They don't take into account IRMAA. IRMAA is a major factor to somebody who might be on a fixed income or is already retired and doing their medicare premiums. If you start doing a lot of this and you could impact their IRMAA and that could have a secondary effect or a waterfall effect and what I commonly refer to as a tax torpedo. Social Security taxation premium tax credit deductions on and on and on. Be mindful of what you're doing could have consequences that may jeopardize your tax goals. Do you need to review how you plan to reinvest your tax savings? This is a great part about planning. We are setting up a game plan much like a football team goes in and has a game plan. Depending on how good your team is that game plan works or does not work. You could reinvest those tax savings for future growth. Make additional contributions or decrease distributions in your portfolio. This is a wonderful little uh paragraph here most people breeze over and don't think is important. But, what do you do once you have created that plan? State-specific rules for tax loss harvesting. Make sure you understand each and individual State rule. Long-term issues; do you ultimately plan to donate your security to charity? Boy, my wife and I love working with Cystic Fibrosis Foundation this past month we did our volleyball tournament for the 17th year I believe and it's wonderful. So look at that, the losses now, harvesting those now, as decreasing your basis, and it will have no effect on your taxation if you donate your security to a charity. In the future what a wonderful thing to do. If harvesting losses creates a carryover loss on your tax return. Are you concerned you'll have more losses than you're able to use during your lifetime? I'm telling you, I still see it today, and nobody believes me, but that '08-'09, I still see people carrying their losses. Consider any capital losses that are not used up by the year of death may be permanently lost. I still see it, believe me, I still see it out there. Poor tax planning that was done back then is still causing uh pain to this day. For some clients again, do you ultimately plan to leave your security to someone as an inheritance after death? Consider harvesting any available losses now to the extent that you can. Use them during your lifetime since the lower cost basis will not affect your heirs. What a great transition piece that we can talk about. Especially if you're a senior citizen. What am I going to do with all these assets? And, to someone, while you're still alive makes sense to harvest any losses prior to gifting of the security. Doing so may create a higher tax liability for the recipient be mindful of any potential double basis issues that may arise for non-spouse recipients when gifting securities at a loss. Be careful if you're going to do something good for somebody make sure you don't inadvertently get double taxation. So implementation issues, do you need a plan for avoiding wash sale rules of security sold for a loss? I see so many people make this mistake when I look at their statements and they have really just destroyed their tax Planning by the wash sale rule. I'm not going to spend an entire 30 minutes talking about it but I could go on and on about so many errors that I see. Do you need to review capital gains netting rules? Oh boy, this is another issue I see a few times. Consider reviewing the order of priority with capital gain netting. Short-term offsets short-term, long-term offsets long-term. That seems very easy but so many people make that mistake. Look at tax loss harvesting organized, organized and have really good detail on what you need to look at. Do I need to review any administrative or trading costs that would be incurred? This is something that we really need to look at because different custodians operate in different avenues. Consider how those impacts would mitigate the benefits of the tax loss harvesting. And do you need to review whether the replacement security you've chosen is appropriate for the security being sold at a loss? Review the IRS language surrounding substantially identical securities for certain types of investments. Mutual funds ETFs overlap underlying holdings correlation to performance, uh, really understand what you're doing here. I see a lot of novice investors really make bad decisions here. And be mindful to the extent of you to replacement security may affect your portfolio's goal and risk-return profile, tracking error, diversification, exposure, and expected return. That's a lot to handle that's why I don't like to let novices do a lot of this work on their own. Please hire a professional these are very delicate issues to talk about and we want to be here to help you. So if you'd like to learn from us hit subscribe. We appreciate those people that subscribe to us and the thumbs-up button to help us with the YouTube algorithm. But remember we are a fee-only company, we do not make commissions. I think that's why people choose to come work with us and we choose to work with them. Because these issues are so impactful and it's not about portfolio return it's about investor behavior. It's a difference when you're ignorant you don't know the rules and when you're stupid and you know the rules but you just decide to do is to make a bad decision. That's why we use all these flow charts and checklists to help our clients understand. This is why we're doing it, here are the rules in place, and here's how we don't violate those rules. We want to take advantage of the rules that are available to us to best help our clients. So we appreciate you coming back time and time again. I really wish I could have done a whole hour on this video. There's so many details about tax loss harvesting and so many times it is not appropriate for a client to take advantage of. But we want to utilize the rules that are there for us to the best effect of our clients and our client's best interests. So thank you so much for coming out hope you have a wonderful day and be well.