While losses are not fun, December is a great time to evaluate your current portfolio of investments and see if you can make them work for you.
The strategy I am referring to is known as “Tax Loss Harvesting.” When used correctly this strategy can increase your investment returns by reducing your tax burden.
How It Works
Depending on your investment decisions throughout the year, you may have realized some gains. If you do not take any other actions, your gains will be taxed at the appropriate rate for your tax bracket. However, if you have investments that have fallen in value, you can sell them to realize the losses and use those losses to offset the gains you made on other investments, thereby avoiding the taxes.
If you have managed to hold on to all of your winners instead of realizing the gains, realizing your losses can still benefit you financially.
Investment losses can be used to reduce your taxable income by up to $3000. Any amount greater than that will accrue and roll over to the next year. Depending on your tax bracket that could increase your tax refund by $500 to $1000.
One thing to be careful of is avoiding a “wash sale.” This is when you sell an investment to realize a loss and then turn around and re-invest the money in the same asset, or an extremely similar one. The IRS doesn’t like people saving money on taxes and wants you to wait at least 30 days after a sale to re-invest back into the same thing (if that is your plan) or else it will be voided as a wash sale and you will not realize the losses.
Implementing The Strategy
Check in with your brokerage if you have one to see what gains you have realized so far this year. 2019 has been a pretty great year for stocks so a lot of people will have made money. If you realized gains, find out what they are, and consider dumping your under-performing investments to offset the gains and potentially get a higher tax refund.
You must do so during 2019 for you to realize the benefits come tax time next April. A lot of us have some time off so its a good time to take a good hard look at what we have and decide what we want to stay invested in and what we want to cut loose.
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