Autumn has arrived. It’s tax-loss harvesting season, y’all.
The leaves are changing, the temperatures are dropping, and Thanksgiving is nearly here. Yes, by nearly all accounts, fall is well underway—and that means it’s time to start thinking about your harvest.
Statistically speaking, if you’re reading this, you’re probably not a farmer by trade. Few are! Nonetheless, at this time of year it’s time to take lessons from those who spend the fall mornings out in the fields, harvesting everything from corn and soybeans to pumpkins, squash, and gourds. The main difference is what you’re planning to harvest.
Your crop of choice: Tax losses.
November is the perfect time to start thinking about your investments in 2019 to save on your taxes next April! Fortunately, you don’t have to worry about getting dirt in your fingernails.
To make the most out of tax-loss harvesting season this year, you need to stop thinking that the only way you can make money on your investments is with interest income. Far from it. At the end of the year, you should switch your mentality and realize that every stock, ETF, or investment vehicle can be a winner if you know what you’re doing.
We’ve written extensively on tax-loss harvesting before, so we’d rather direct you to our previous writing on the subject rather than spending a lot of time describing it here. (Read a complete rundown of tax-loss harvesting here, or read up here on how to report investment gains and losses.)
But to save you some time, we’ll briefly touch on what tax-loss harvesting is.
When you put money in an investment vehicle—like a stock—you can either make money or lose money. If you make money, you’re taxed on that income when you sell the investment, either as a capital gains tax or as ordinary income (the length of time you’ve held the investment dictates which).
If you lose money, you can count that loss on your taxes once you’ve divested. Tax-loss harvesting is a tax strategy employed to offset your gains from other investments or boost your deduction, thus lowering your tax obligation.
If you’re looking to make the most of your tax-loss harvesting season, you deserve a couple of tips on how to get there. We’re here to help you with a bountiful harvest.
We’ve all seen pictures of prizewinning pumpkins, those giant, sagging marvels that seem to spring up a ton on social media and the news this time of year. But even a giant pumpkin like those can really only get so large.
The same thing is true of your tax-loss harvesting. While you can use a tax-loss harvesting strategy to net your investment losses against your gains (more on the process here), many loss harvesters choose, instead, to deduct their losses against their income. If that’s you, keep in mind you have an upper limit to how much you can deduct in losses: $3,000.
Fortunately, there’s always next season. If you’ve ended up with a loss of $5,000, you can deduct $3,000 this year and $2,000. If the total is more than that, you can harvest $3,000 of your losses each and every year until you’ve accounted for that total.
Farming doesn’t just require early mornings and a tractor. A successful farmer knows her way around an almanac, has a natural green thumb, and isn’t afraid of a little dirt.
Tax-loss harvesting is a really useful tax strategy, and can help you weather market volatility and maintain some financial upside, even when you experience an investment loss. However, you shouldn’t view it as a replacement for poor investing choices.
Even if you’ve experienced some dips in your investment’s value, that isn’t a sign that you should get out now while you can deduct a loss. Like a good farmer, you should know when your harvest is ready. While a good tax prep company can help you get the most out of your tax savings, it’s always wise to use a reputable financial advisor for any of your investments.
It’s tax-loss harvesting season, but that doesn’t mean you need to take action. Discuss your financial goals with your advisor, ensure you’re comfortable with your risk profile, and if you determine this is a good year to deploy tax-loss harvesting, get in touch.
We’ll make sure you not only get the most out of your tax-loss harvest season, but that you find every last deduction there is and file a perfect tax return.