Blog

How Tax-Loss Harvesting May Help Lower Your Tax Bill

A volatile year in the financial markets can create opportunities for reducing your taxable income.

Many investors use the closing months of the year to review their portfolios and assess their winning and losing investments. It’s also a good time to do tax planning for the upcoming filing season; decisions you make before year-end can help you lower the taxes you own on your ordinary and investment income.

Tax-loss harvesting is one strategy many investors use to offset taxable investment income and capital gains with capital losses. After a volatile year in the markets, you may see a stark divide between winners and losers in your portfolio. There is opportunity, however, to consider selling certain investments that realize losses you can use to lower your overall tax bill.

Use losses to lower your tax liability. Tax laws permit you to take a credit for any investment losses you incur during the calendar year to lower realized capital gains and possibly your taxable income. For example, let’s say earlier this year you sold a stock position you’ve held for several years and realized a profit of $1,000. This profit will be taxed as a capital gain at a rate of as much as 20%, depending on your tax bracket. However, let’s say you sold another long-term stock position this past year for a loss of $600. You can use this capital loss to reduce your total capital gains for the year to $400. The most you’d pay in taxes on this gain would be $80. ($400 capital gain x 20% maximum cap-gain tax rate.)

You can also use tax-loss harvesting to reduce your ordinary taxable income, if you realize losses in excess of your total capital gains for the year. You can apply capital losses up to $3,000 in a calendar year—a small amount, but potentially significant if the credit lowers your total annual taxable income and keeps you from moving into a higher tax bracket.

Carry over excess losses for the future. If your total losses for the year exceed your total capital gains, you can also apply these losses against future capital gains by carrying them over to another tax year. The IRS caps this capital-loss carryover at $3,000 per year, but you can extend the losses over consecutive years until the entire amount of the capital loss is applied.

Know the “wash sale” rule. If you plan to sell a security for a loss, the IRS forbids the purchase of the same security or a “substantially similar” security for 30 days before and after the sale. This type of transaction is known as a “wash sale”. It’s an important rule to remember if, for example, you want to sell an indexed ETF and purchase another ETF linked to the same index. Violating the wash-sale rule could disallow any offset losses, not only for the current tax year but potentially future tax years as well.

Thanks for checking out the blog.

Gregory Armstrong, CFP®

This material is for general information only and is not intended to provide specific advice or recommendations for any
 individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive 
outcomes. Investing involves risks including possible loss of principal. This information is not intended to be a substitute for 
specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
 
This material was prepared by LPL Financial. 
 
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and 
broker-dealer (member FINRA/SIPC). 
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice 
from a separately registered independent investment advisor that is not an LPL Financial affiliate, please note LPL 
Financial makes no representation with respect to such entity.

Share This Article

Life insurance has come a long way since the days when it was known as burial insurance and used mainly to pay for funeral expenses. Today, life insurance is a crucial part of many estate plans. You can use it to leave much-needed income to your survivors, provide for your children’s education, pay off your mortgage, and simplify the transfer of assets. Life insurance can also be used to replace wealth lost due to the expenses and taxes that may follow your death, and to make gifts to charity at relatively little cost to you.

Life Insurance at Various Life Stages

Your need for life insurance changes as your life changes. When you’re young, you typically have less need for life insurance, but that changes as you take on more responsibility and your family grows. Then, as your responsibilities once again begin to diminish, your need for life insurance may decrease. Let’s look at how your life insurance needs change throughout your lifetime.

Taxation of Investments

It’s nice to own stocks, bonds, and other investments. Nice, that is, until it’s time to fill out your federal income tax return. At that point, you may be left scratching your head. Just how do you report your investments and how are they taxed?

Investing in Stocks

Businesses sell shares of stock to investors as a way to raise money to finance expansion, pay off debt, and provide operating capital. Each share of stock represents a proportional share of ownership in the company. As a stockholder, you share in a portion of any profits and growth of the company. Dividends from earnings are paid to shareholders, and growth is realized by the increase in value of the stock.

Six Keys to More Successful Investing

A successful investor maximizes gain and minimizes loss. Though there can be no guarantee that any investment strategy will be successful and all investing involves risk, including the possible loss of principal, here are six basic principles that may help you invest more successfully.

Are You an Investor or a Speculator?

Recent market news — around social-media driven stock trading that created extreme price swings for shares of certain companies — may have you wondering whether you should jump into the excitement. Before you leap, you might consider this advice from legendary investor and teacher Benjamin Graham, considered the father of value investing: “The individual investor should act consistently as an investor and not as a speculator.” (1)

Blog

How Tax-Loss Harvesting May Help Lower Your Tax Bill

How Tax-Loss Harvesting May Help Lower Your Tax Bill

Share This Article

You May Also Like

Life Insurance and Estate Planning

Life Insurance at Various Life Stages

Taxation of Investments

Investing in Stocks

Six Keys to More Successful Investing

Are You an Investor or a Speculator?

Don't Miss Anything

LPL Financial Form CRS

Don't Miss Anything