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If you follow the stock market, you know that markets have been highly volatile in 2022. You have likely seen the value of some of your investments drop below what you have paid for them. This may be a great time to revisit tax-loss harvesting and use the stock market drop to help you lower your tax bill for 2022.
The Limits of Tax-Loss Harvesting
Investment gains and losses will be netted against each other to determine your taxable investment gains. Capital gains are split into short term (shares held less than a year) and long term (shares held longer than a year). If you have more short-term losses than gains, you can deduct up to $3,000 against your regular income. Remaining losses beyond this amount can be carried forward to future years.
Tax-loss harvesting rules will vary at the state level. California taxes capital gains as regular income. So as a Los Angeles Financial Planner, tax-loss harvesting can be extremely valuable for my California tax-planning clients. Talk with your tax-planning financial planner and tax person to see how tax-loss harvesting could benefit you by helping lower your state taxes on capital gains.
You Need to Know About the Wash Sale Rules
The wash sale rule prohibits investors from selling an investment for less and then rebuying the same or “substantially identical” investment within 30 days before or after the sale for a loss. If you don’t follow the wash sale rules, you can lose the tax benefits of your tax-loss harvesting sale.
Tax-Loss Harvesting Can Be Done Throughout the Year
Many people think about tax-loss harvesting at year’s end. However, you can make tax-loss harvesting transactions anytime during the year. The tax benefits of tax-loss harvesting are typically the most valuable when there is a significant drop in the stock market (like we are seeing now). Hopefully, you are working with an amazing financial advisor who offers proactive tax planning. You don’t have to think about it; you will just realize the tax benefits when you file your taxes next year.
Shouldn’t You Buy Stocks Low and Sell High?
In a perfect world, every investment you make would result in you buying it at a low price and eventually selling it at a higher price. Even an investment portfolio that has performed amazingly well over the long term can have some losers. Or, perhaps, some of your purchases are worth a bit less than what you paid, even if the investment is up over the time you began buying shares.
Tax-loss harvesting has been around and used by the ultra-wealthy for quite some time. However, it recently came to the attention of a wider swath of stock investors who are not super-wealthy. Technology and reduced (or eliminated) trading costs have made the tax-minimization benefits of tax-loss harvesting easier to implement and much less time-consuming and costly. Tax-loss harvesting can help boost your net after-tax investment returns without taking on more risk. Who doesn’t love saving money on taxes?