It’s impossible to reliably predict future changes within the investment markets, however there are numerous ways for investors to favorably influence their own results. Important areas to focus on include developing an investment plan, saving regularly, diversifying widely, adhering to an appropriate asset allocation, and paying attention to all forms of costs – including taxes. For many investors, tax loss harvesting can improve their after-tax bottom line, sometimes to the tune of thousands of dollars per year.
Steve Thorpe’s Top Five Tax Loss Harvesting Tips:
- Portfolio reviews for TLH opportunities are best done periodically throughout the year—with harvesting implemented whenever the benefits significantly outweigh the costs.
- It’s always a good idea to review your portfolio in December in case there are final harvesting opportunities available for that taxable year. In December 2012, there may be additional considerations related to possible 2013 tax rate changes.
- If you have a significant unrealized loss that is short-term, it’s usually best to take it before it becomes a long-term loss.
- If you are considering realizing a gain, think about waiting until the security has been owned for more than one year so that the gain is eligible for the most favorable long-term capital gain tax treatment.
- Don’t get trapped by the Wash Sale Rule. Replace securities sold at a loss with similar—but not substantially identical—securities.
Every individual’s situation is unique, tax laws are complex and always changing, and there are subtle nuances not discussed here. Hence, these tips should be considered general educational information only and not specific recommendations customized to any individual’s circumstances. If you have any uncertainty about your own situation, do your research! A few resources include:
- For more information on tax loss harvesting as well as possible impacts from potential 2013 tax rate changes, you’ll want to read, “Tax Loss Harvesting: Share Your Pain with Uncle Sam” which we published here on the Portfolioist earlier in August 2012.
- The IRS web page “Ten Important Facts About Capital Gains and Losses”
- IRS Publication 550 “Investment Income and Expenses”
- IRS Publication 551 “Basis of Assets”
- IRS Fact Sheet “Reporting Capital Gains”
- Most importantly, the reader is advised to consult a licensed tax professional to best understand how to apply these techniques to their own unique situation.
To insure compliance with requirements imposed by the Internal Revenue Service, we inform you that any tax advice that may be contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or any state or local tax law to which a governmental requirement similar to Circular 230 applies.
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