Anthony Saffer VP / Financial Advisor CFP®, CKA®,

Alex Okugawa  / Financial Advisor CFP®, CKA®, CEPA®

Anthony Saffer 0:00
What is tax loss harvesting? Should you use this strategy to save taxes? And how does it apply for this year? Stay tuned, we’re going to answer these questions. All right, Alex, tell us first, what is tax loss?

Alex Okugawa 0:12
Yeah, well, the first thing people need to know is that this applies to investments outside of retirement accounts. So this doesn’t apply to things like investments in your IRA, your Roth, or your 401k. And in general terms, what happens is, is losses can be used to offset gains. And if you have more losses than gains in a particular year, what you can do is you can deduct up to $3,000 of that loss

Anthony Saffer 0:38
on your tax return, right? And anything that maybe goes over that 3000, you could potentially carry forward to a future year

Alex Okugawa 0:43
Exactly. Now, when we’re thinking about this strategy, right? Because you might have some investments that have losses, but it shouldn’t be used just across the board. I’ll give you an example. Let’s say you hold Microsoft in your taxable investment account, and it’s out of loss, doesn’t mean you should necessarily sell Microsoft, because you’re going to realize that loss and deduct on your tax return. But what are you going to do in the meantime? Like, are you going to buy another investment?

Anthony Saffer 1:07
Because you can’t buy it right away? You can purchase it,

Alex Okugawa 1:09
right? There’s special tax rules called the wash sale rule. So you know, maybe like, Oh, well, I’ll buy Apple once I sell Microsoft to kind of stay in the game stay in the market. But the problem is, is all those two, those two tech are two companies are really like tech related. They’re totally separate. And you could have a really different experience, right?

Anthony Saffer 1:26
And it’d be different if you have an s&p 500 index fund, switch over to another fund in order to hold that as a see exactly. So okay, so tell us how does it apply for this year, specifically?

Alex Okugawa 1:36
Absolutely. So depending upon when you like, bought your investment, you might not have a lot of losses, the markets been good, exactly this year, the markets been really good. So not a lot of people have losses in their investments, especially if they’ve held them for any substantial amount of time. However, you know, let’s say you own like mutual funds, in your taxable investment account, you might want to look to see like, hey, are these mutual fund holdings going to distribute any type of capital gains to you, because you don’t have to necessarily sell the mutual fund to receive a capital gain from the fund. So you can look to see like, hey, I’ve begun to distribute, it doesn’t make sense to sell it to avoid the distribution. And then I’d say probably the other thing, too, is looking at your tax rate for this year, right? If you’re in a really low tax here, or maybe you’ve had some big charitable deductions that are brought down your taxes, it actually might make sense to what’s called harvesting gains, like intentionally realizing capital gains, because you’re in such a low tax bracket. And for some folks, that can actually mean being in a 0% federal federal bracket and paying no taxes on the gain.

Anthony Saffer 2:43
Yeah, because capital gains are typically at a lower rate than ordinary income tax. But if you’re in a lower marginal, ordinary income tax rate, the capital gains could actually be zero. Absolutely. And there’s a lot of talk with the tax proposals that capital gains rates are going to go up. So some people are thinking I’m going to take my gains now, rather than than wait. Yep, got it. All right. It’s this kind of stuff that we help people with through financial planning, coordinating that with investment plans. If you’d like to talk to us go to one degree advisors Comm. We would love to speak with you.