Tax Loss Harvesting - Tax reduction (if done right!)

Reduce Taxes with Tax Loss Harvesting
Tax Loss Harvesting is one way that you can take advantage of stock market declines to strategically provide a tax deduction.

For more, visit: https://arnoldmotewealthmanagement.co...

No one ever roots for their investments to go down in value, but of course it is inevitable to happen sometime if you are investing over decade long periods. And knowing how, and when, to tax loss harvest can provide you tens of thousands in tax deductions over your life.

Tax loss harvesting can be technical – But we think it is important for you to see the potential value in performing the task, and its implications.

And also, we like to remind those reading that as clients of Arnold and Mote Wealth Management, this is just one of the many tasks we perform for you.

In this article, we’ll start with a quick overview of what tax loss harvesting is, and then move on to some financial planning strategies around tax loss harvesting, and then end on detailing some times when it would be a mistake to perform tax loss harvesting.

What is Tax Loss Harvesting?
To start, just to make sure we are on the same page. What do we mean by tax loss harvesting?

Tax loss harvesting is purposely selling investments that have gone down in value to recognize a loss.

There is a common saying for investors: “Its not a loss until you sell” – And that is exactly what we are doing. We are deliberately trying to recognize a loss.

Just as a simple example. Let’s say you buy 100 shares of Microsoft for $100 per share, for a total of $10,000 invested.

But, lets say you made that purchase in January of 2020, and 2 months later, the stock had dropped down to $70 per share. So now, your $10,000 original investment is worth just $7,000. If you sell you would have a $3,000 loss.

It is important to note that this is just for taxable brokerage accounts. This is your SchwabOne brokerage account, designated beneficiary accounts, or trust accounts if you have your investments with us at Arnold and Mote. This does not apply to IRAs, 401ks, or Roth IRAs.

At this point, if we would think tax loss harvesting is beneficial to you, we might advise that you sell this investment and recognize this $3,000 loss.

Selling when your investments that fall in value is a little different advice than what you have heard us say in the past.

You have probably heard Eric, Quinn, or Matt talk about ignoring the volatility in the stock market, and not getting worked up about times the market goes down, and instead being a long term investor.

So, what is the difference between that advice of saying buy and hold, compared to now telling you to sell?

Benefits of Tax Loss Harvesting
The difference is that there are certain benefits for recognizing a certain amount of loss at certain times.

The most important of which is a tax deduction.

By taking that loss, you can take a deduction on your income for the year. And it is a very important deduction, called a top line or above the line deduction. This lowers your AGI, or adjusted gross income.

You can look for yourself how this plays out on line 6 of your 1040 on your tax return.