Sell some of your losing stocks and reap the tax harvest. Tax deductions, ahoy!
Now that December is here, it's a good time to start looking at how you can pile on the tax deductions. In my case, I've got to the point where I do the tax planning thing all year, so there aren't a lot of tax deductions left for me to take. I'll probably make a couple more charitable donations, and I need to see where I stand with my HSA contributions (but I have until April 15 to work that out, if it makes sense for me), but I'm mostly done.
However, there is still one more change I can make. I can look through my stock investments to see if I have any losers I want to use for the tax harvest.
Tax Harvest Investment Losses
You can deduct your investment losses from your income, so it can actually make sense, in some cases, to lock in your losses. It's a little bit harder to do right now, in a world where the Dow is hovering around a record high, but you might have some losers just sitting there, doing nothing for your portfolio. If that's the case, you might as well sell and get a tax benefit. Here's how it works:
- First, offset any capital gains you have realized this year with your capital losses. You'll first match up short-term gains with short-term losses and long-term gains and with long-term losses, but any spillover can jump categories so that if you have enough losses it will offset your capital gains.
- Next, see if you have losses left over. If the amount of your capital loss is more than your gain, you can apply up to $3,000 of your total capital to your other income.
- If your loss is more than $3,000, it's possible to carry the remainder forward indefinitely. Keep good records so that you can continue to tax harvest big capital losses.
Hopefully, you won't have such huge losses that you do a lot of carrying forward. However, if you are in the process of completely restructuring your portfolio for whatever reason, keeping good records can help ensure that you get the best bang for your investment loss buck.
Of course, I don't have a lot to tax harvest right now. I have invested in a few dividend stocks, but other than that, most of my investments are in index funds (I'm such a boring investor) that currently see net gains. On top of that, most of my index funds are in my Betterment Roth IRA anyway, so I'm not going to touch them.
But I'll take a look anyway, and see if I have any capital losses. I did get lucky the year my basement flooded. The bulk of my emergency fund is kept in a taxable investment account, and I did have a few losses then, so, even though I had to sell some of my shares at a loss to pay for the cleanup of my basement, the whole exercise was a tax deduction. The tax harvest worked out well for me that year.
It's a good time to review your investments, and figure out which are losers that should go. (Watch out for the IRS wash rule, though. You can't re-buy the same thing within 30 days.) Then, tax harvest those losses to reduce your income and your liability. You'll clean up your portfolio and reduce your taxes.