Tax-Loss Harvesting and Your Investment Planning

My comments today complement another tax-loss harvesting video previously recorded by Bethany Muensterman, an investment manager here at Payne Wealth Partners. If you’re unsure what tax-loss harvesting is, you’ll first want to watch Bethany’s video and then come back to this one. One key point to remember is that tax-loss harvesting applies to taxable or non-qualified investment accounts. It does NOT apply to retirement accounts such as IRAs or 401(k)s.

How to consider Tax-Loss Harvesting in your Investment Planning

In our firm, many tax-loss harvesting decisions are coordinated through interactions between our investment team and our planning team. Why? Because each member brings different knowledge and different specialties to the discussion. As Bethany described, overall portfolio decisions are very important to ensure the “tax tail” doesn’t wag the “investment dog” so to speak. In other words, it’s probably not wise to throw your desired portfolio make-up (asset allocation) out the door to harvest losses. That’s one key part of what the investment team is evaluating. They also must avoid breaking a certain rule called the “wash sale rule.”

When to Advise Against Tax-Loss Harvesting

To complement this investment analysis, Wealth Planners like myself are often looking more closely at each client’s specific income tax situation. In fact, there may be instances when tax-loss harvesting (from a Planner’s perspective) may not be wise. For example, under current law taxpayers who fall below the 25% federal tax bracket are taxed on long-term capital gains at 0%. That’s right! You heard me correctly. 0%! Now, there may be state and local taxes to pay, but those are often minimal compared with federal income tax. If someone’s in that situation, we may advise against tax-loss harvesting. In fact, we may even consider realizing long-term gains that year since they’re taxed federally at 0%. There are other planning considerations in that decision that we won’t cover today, and there are other reasons why we may not advise tax-loss harvesting for someone in a particular year.

In the previous video, Bethany told you how losses can offset portfolio gains. If those losses are more than your total gains, additional losses can often offset ordinary income up to $3,000 per year per tax return. As planners, we want to think about this as it may be very valuable to some high income earners.

The bottom line is this: we believe a team approach can often provide well-informed recommendations and decisions.

If you have questions about tax-loss harvesting in your investment accounts, please feel free to contact someone on our team at Payne Wealth Partners. Remember… Uncle Sam isn’t really your uncle, so be wise in your tax planning.

Terry Pratherstart-the-conversation

Published: December 23, 2015

Author: Terry Prather, CFP®, ChFC®, MSFS


Phone: (812) 602-6307

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The information in this material is only as current as the date indicated, and may be superseded by subsequent market events or for other reasons. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements. The information does not attempt to examine all the facts and circumstances that may be relevant to an individual’s financial needs. Payne Wealth Partners, Inc. is not soliciting any action based on these statements.

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