To achieve the maximum benefit from your investment portfolio, your financial adviser should not only manage it for investment returns but for tax efficiency as well. Tax loss harvesting is a classic strategy advisers should use throughout the year to help control their clients’ tax liability.
Generally, at the end of the year, investors evaluate their portfolio, taking stock of the winners and losers for the year. However, at Henssler Financial, we watch your investments closely throughout the year so that we can help you offset investment gains or losses by taking advantage of market ups and downs.
Furthermore, by realizing a capital loss, you are able to offset taxes on other investments and income. Up to $3,000 of excess losses can be used to offset ordinary income, with excess losses carried forward indefinitely. By working closely with our clients and their tax advisers, we keep in mind other income that could be offset by tax loss selling. For example, if we know a client has a gain on a piece of property that was sold, we may be able to minimize the tax consequences by recognizing a loss in a long-term holding. Likewise, if we know a client has any loss carried forward from previous years, we may look to recognize gains when the market has reached a new high. When you sell an asset at a gain to offset your losses, you can immediately buy it back. Doing this increases the tax cost basis of the stock, which in turn, should lower any realized gain when the stock is eventually sold.
It is imperative to follow a disciplined, analytical approach when taking capital gains and losses. You must consider the potential appreciation for the security(ies) under review and other relevant financial planning issues, such as liquidity needs, tax impact, investment alternatives and portfolio fit. If an investment still meets our stringent investment criteria, fits our client’s objectives, and we’ve determined the stock holding is down because of normal fluctuations, we then explore if recognizing the loss would improve our client’s tax situation.
Why take profits when the stock has done well for you, if there may be adverse tax consequences as a result of selling?
There are times when your investment may have done so well that it has become overweighted (10% or more of a portfolio) and subjects your portfolio to unnecessary risk. Lack of diversification is the single biggest problem we see in poorly managed portfolios. Trimming overweighted stocks is a good way to diversify your portfolio, without having to add new money. The reluctance to take capital gains is the single largest factor that stands in the way of portfolio performance.
In 2016, if your tax bracket falls within the 25% to 35% range, your long-term gains should be taxed at 15%. Those in the 39.6% bracket—generally, if you have income exceeding $415,050 for individuals and $466,950 for married filing jointly—should pay 20% on capital gains.
Should I take losses when the stock is down?
If you assessed the company’s potential and it fits your portfolio, do not panic and sell because the stock price has fallen. If you have a substantial loss and would like to offset gains, you can sell the stock and buy it back in 31 days. When selling for a loss, you need to be careful of the wash sale rule, which prevents you from deducting a loss on the sale of an asset if you buy the same or “substantially identical” asset within the wash sale period. This means if you sell a stock specifically for a tax loss, you cannot buy it back for 31 days (trade date plus 30 days); otherwise, the sale no longer qualifies for a tax loss.
You also need to take notice of when you purchased the asset you want to sell for a tax loss. You cannot sell a stock for a loss that you have purchased within the last 31 days. If you want to sell shares of a stock for a loss in one account, but purchased it within the last 31 days in another account in your name, you must sell your entire position in the stock. For the sale to qualify as a tax loss, you must sell all positions in the stock in any account under your control. In some instances, selling all positions in the same stock might defeat your purpose depending on the potential realized gain or loss in your other positions.
If the positions being sold for a loss are substantial, we reduce the risk of having that money out of the market by purchasing SPDRs or sector exchange-traded funds. After the wash sale period, you can sell the SPDRs or ETFs and then repurchase the stock.
At Henssler Financial we continually analyze the stocks we recommend for our clients, as well as other stocks that meet our criteria for financial strength, dividend quality and safety. We also consider other relevant financial planning issues before we take capital gains and/or losses for our clients.
We remind our clients to remember two things when it is necessary to take capital gains and losses: 1. Long-term investing, as opposed to stock trading, will allow you to meet your financial plan objectives, and 2. It is important to consider tax implications; however, do not let the “tax-saving tail wag the investment dog.” While no one enjoys paying taxes, it is still better to have your wealth growing than shrinking.
If you have questions, contact the experts at Henssler Financial:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
