Some investors may have heard their advisor talking about tax loss harvesting when their eyes started to glaze over in their last meeting.  Tax loss harvesting is an investment management strategy that can help clients save money on taxes.  Firms that pay attention to tax savings and efficiency oftentimes identify clients throughout the year that can benefit most from the tax savings.

Tax loss harvesting is exactly what it sounds like.  For example, you buy an investment for $10, it declines in value to $8 and you sell it for a loss of $2. Typically if you still like that type of investment you will replace the sold investment with another similar investment (e.g. replacing a mutual fund with an ETF).  The result is that you now have a “capital loss” to report that can be used to offset any “capital gains” within the portfolio and/or report the loss on your individual income tax return to offset ordinary income (*up to $3,000).  It is important to note that if you are replacing the investment with a similar holding, theoretically if that market sector or investment recovers (as it normally does), the capital gains tax will be paid at some point in the future when it is sold.    

Technology has made identifying these opportunities easier than ever before however, technology doesn’t tell us what is going on in a client’s life.  If someone has uneven income (commission, bonus), stock options, real estate investments, has retirement knocking on the door, or they expect their TAX RATES TO INCREASE, then a tax loss harvesting strategy might not be in the client’s best interest.  This leads me to a less popular strategy sometimes called tax gain harvesting.

Tax gain harvesting is exactly the opposite of tax loss harvesting.  Instead of selling an investment to capture a loss, you are selling to capture a gain.  You might be asking yourself, who in their right mind would want to capture a gain and pay tax?  If you expect tax rates and/or your income to increase, then it might make sense to secure the lower tax rate instead of paying a potentially larger tax bill later.

With the change in political power, many are expecting an increase in tax rates from the Biden Administration.  Even if congress doesn’t pass any new tax laws, the lower tax rates will sunset and increase at the expiration of the Tax Cuts and Jobs Act of 2018, which will take effect January 2026.

From a broad perspective (assuming Married Filing Jointly), here are a few examples that might warrant a tax gain harvest:

• MFJ – have taxable income less than $105,800 – have LT Capital Gains – secure 0% tax

• MFJ – increasing income near $445,000 – LT Capital Gains – secure 15% tax rate

• Exercise stock options and hold – will cause a spike in AMT - take a gain to offset AMT tax

• Near or in retirement – prior to taking RMDs – capture gains to lower retirement income tax and medicare premiums

Like most things, there are a number of factors to take into consideration when taking advantage of opportunities like this so it is important to discuss with your Certified Financial Planner™ or tax advisor.  If your investment advisor isn’t having these discussions with you, please schedule 15 minutes on my calendar to find out how we might be able to help.  https://calendly.com/ianjwild/intro