Utilizing Tax Loss Harvesting for 2024 Tax Savings

Tax Loss Harvesting: A Guide to Lowering Taxes Through Investment Strategy

When it comes to investing, we all hope to see our investments grow over time. But what if an investment loses value? Surprisingly, this could work in your favor when it comes to taxes. Enter “tax loss harvesting,” a strategy that allows investors to use a loss from one investment to offset gains from another. Let’s dive into what this strategy entails and how it can benefit individual investors like you.

First things first, tax loss harvesting applies only to investments held in non-retirement brokerage accounts. This means you can’t use this strategy for retirement accounts like 401(k)s or IRAs.

So, how does it work? If the current value of an investment is lower than what you paid for it (also known as the cost basis), you’ve experienced a loss. Selling the investment locks in that loss, creating what’s called a capital loss. This capital loss can come in handy come tax time.

Here’s how it works: you can use a capital loss to offset a capital gain dollar-for-dollar. And if you have leftover losses after offsetting gains, you can use up to $3,000 of those losses to lower your taxable income for the year. This limit is halved for married individuals filing separately.

The beauty of tax loss harvesting is that it can span multiple years. If you have more losses than gains in a given year, you can carry those losses forward to offset gains in future years.

Especially during volatile market years, like 2023, tax loss harvesting can be a smart move for your portfolio. By stashing those capital losses in a tax savings account, you give yourself flexibility in how and when to use them to reduce your tax burden.

While tax loss harvesting sounds like a dream come true for investors looking to save on taxes, there are some important details to keep in mind.

Let’s talk short-term versus long-term capital gains and losses. Whether a gain or loss is short-term (owned for one year or less) or long-term (owned for more than one year) impacts how it’s taxed. Short-term gains are taxed as ordinary income at your regular tax rate, while long-term gains are taxed at a lower, preferential rate.

For mutual fund investors, capital gain distributions can also play a role in tax planning. Harvesting losses to offset these gains can be a savvy move.

When it comes to finding investments to sell for losses, focus on assets that no longer align with your financial goals or that have limited growth potential. And remember, short-term losses are usually more valuable since they can offset higher-taxed short-term gains first.

IRS rules dictate that losses should first offset gains of the same type. But if you have excess losses, you can apply them across different types of gains.

Lastly, if you end the year with more losses than gains, you can use those losses to reduce other income, up to $3,000 per year. Married couples filing separately have a lower limit.

In the world of investing, every penny counts. Consider tax loss harvesting as a valuable tool to manage your tax bill and make the most out of your investments.