Harvesting Investment Losses for Tax Purposes
October 25, 2011 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
You frequently hear investment professionals suggest “harvesting losses” before the end of the calendar year to save money on taxes. Loss harvesting can be a highly productive strategy, and it pays to understand how it works and when you might not want to take advantage of it.
The opportunity to harvest losses is available in taxable investment accounts – this includes joint or individual accounts — not IRAs, education savings plans, or employer retirement accounts.
You calculate the gain or loss by subtracting the total purchase price for the investment (including any dividends reinvested) from the proceeds you received from selling the investment. For example, if you purchased a mutual fund for $10,000, reinvested $1,000 in dividends over the years you owned it, and then sold it for $13,000, you would have a tax gain of $2,000. If you sold it for $10,500, you would have a tax loss of $500.
When you sell an investment in a taxable account, you owe taxes on any gain and can deduct any losses against your income on your taxes (up to $3,000 per year). Gains or losses from different investment sales offset against each other to produce a “net” gain or loss. For example, if you have $10,000 in losses and $11,000 in gains, you have a $1,000 net gain. If you have net losses greater than $3,000 in a single year, they can be carried forward to offset gains or be deductible in future years.
Harvesting tax losses can help you offset gains from other investments sold in a given year, and it can result in a deduction on your tax return. Think of the value of a $3,000 deduction — if you’re in the 25% tax bracket, it saves you $750 on your taxes; in the 35% tax bracket, it saves $1,050.
So when wouldn’t you want to pursue this strategy?
- If it’s going to take your asset allocation away from your target. Asset allocation is the biggest factor in investment success. You shouldn’t implement a loss harvesting strategy if it can’t be done without maintaining your target asset allocation. You can usually maintain your target allocation while harvesting losses by purchasing other investments in the same asset class at the same time you sell the loser, but you have to understand and comply with the IRS’s specific wash sale rules to be sure you don’t negate your loss.
- If you’re in the 10% or 15% tax bracket this year and next – you can report long-term capital gains (>1 year holding period) up to the top of the 15% bracket and pay 0% in taxes. If you take losses to offset the gains, you would essentially be “giving” the losses away for free.
There are of course many other situations unique to the individual set of circumstances, so it pays to coordinate your strategy with your tax advisor and financial planner to make sure it’s a win for you.
October Personal Finance Newsletter
October 13, 2011 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The October personal finance newsletter is now available. We review the third quarter investment markets performance and provide perspective on the current economic situation. In addition, the newsletter includes information on medicare open enrollment, how markets have historically reacted to countries’ debt rating changes, and more. To view the newsletter, click here.
Best Financial Planner Award 2009 – 2011
October 7, 2011 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
Thank you to the readers of the Keller Citizen for voting Keener Financial Planning Keller’s Best Financial Planner again for 2011! We greatly appreciate your support, and enjoy providing financial planning and investment advice for our clients in Keller and greater North Texas.
Jean with Thank You Sign
Keener Financial Planning’s mission is to provide objective, expert financial advice tailored to your unique situation on a fee-only basis. Your concerns may be retirement, college, rebuilding after divorce, changing careers, getting control of your finances, investing more effectively– or likely some combination of those and others. We take your goals, work with you to discover the best path to reach them, and define clear action steps to get you there.
Look for the “Best of” special section in the Keller Citizen on Wednesday, October 26 to see all of the winners. Thanks again for your support!
Coordinating Spousal Benefits for Social Security
October 3, 2011 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
Coordinating spousal benefits in filing for social security can make a big difference in your retirement income. Contrary to popular practice, it’s not automatic that each spouse should just file for social security benefits as soon as he or she retires. As a couple, you have the potential to increase your income over your whole retirement and maximize security for the surviving spouse through effective planning.
Social security offers some surprising options to help couples (including divorced couples married for at least 10 years) take full advantage of all benefits available to them.
Did you know that spousal benefits are not restricted to the low-earning spouse and can be claimed by the husband or wife?
A high-earning spouse who wants to wait until age 70 to file on his or her own record to receive maximum delayed retirement credits, can file for spousal benefits on the lower earning spouse’s record at full retirement age. This allows the high earning spouse to receive at least some social security without reducing his or her own maximum delayed retirement benefit.
Did you know that the primary worker has the option to file and suspend his or her own benefit and still allow the spouse to start receiving benefits?
This option allows the primary worker to continue earning delayed retirement credits while the lower earning spouse starts to receive a spousal benefit on the worker’s record.
Did you know that by the higher earning spouse delaying benefits to age 70, both husband and wife enjoy longevity protection?
When the first spouse passes away, the surviving spouse gets to keep the higher of their two benefits – including delayed retirement credits. These benefits are indexed for inflation, so even if the surviving spouse lives another 20 years after the first spouse’s death, he or she will benefit from the delayed retirement credits growing with inflation over that entire time.
These considerations are just the tip of the iceberg in planning for social security! For couples nearing age 62, the pay-off on the effort to fully analyze this decision is enormous.