
Kara Duckworth
CFP®, CDFA®, Managing Director of Client Experience
While we are officially in a bear market and volatility in the financial markets reigns supreme, it’s normal to worry about your finances. As a financial advisor, I feel these emotions with you and understand the impact the market volatility has on all of us. But even in bear markets, it matters where we focus our attention. One way we take advantage of this is to carry out tax loss harvesting in our client portfolios.
Tax loss harvesting helps you minimize the amount you pay in capital gains by offsetting the amount you claim as income. Essentially, when you sell an investment at a loss, you can “harvest” that loss and use it to eliminate any gains you may have from selling investments during the year. If you don’t have any gains, you can also use the losses against your ordinary taxable income as well, up to a limit of a $3,000 loss claimed per year.
Even in bear markets, tax loss harvesting can help turn investments that may be in the red into a lower tax bill and positively influence your financial plan’s long-term success. Tax loss harvesting can also help diversify your portfolio if you are holding a single investment or a concentrated position.
Tax loss harvesting benefits those who are in a higher tax bracket. If you are currently in a lower tax bracket and expect that you will be in a higher one in the future, you might want to save the tax loss harvesting until then. You will always need to start claiming the loss in the year it occurs, but if your losses exceed $3,000, you can carry forward this excess loss in future consecutive years. Tax loss harvesting is not a strategy to use in tax-deferred accounts, such as IRAs and 401(k)s, because gains in these accounts are not taxed.
Let’s say you inherited a large amount of Apple stock from your tech-enthusiast grandmother. You’ve refrained from selling it because of the unrealized capital gain of $200,000 you would incur. And, if you are in the maximum federal tax bracket, you would owe 20%, or $40,000, of this gain in capital gains tax, plus a possible state tax liability depending on where you live.
However, you’ve also been holding mutual funds that invest in a small handful of countries. Since these funds have lost significant value in the bear market, you can sell them and realize a capital loss, in this case a loss of $250,000. This loss that would offset the $200,000 gain on your Apple stock. As a result, you would net $0 in capital gains tax this year. In addition, you’ll have $50,000 in loss you can carry forward against future gains. This allows you to use the proceeds from the sale of the Apple stock and the mutual funds to rebalance your portfolio into more diversified assets that are better suited for your long-term goals. The “paper loss” you took saved you “real dollars” in taxes while enhancing the future success of your financial plan!
Wash sale rules. You can’t sell an investment, such as a stock or a fund, and buy it back until 31 calendar days after the sale date. This is called a “wash sale,” and the IRS will disallow your claim if you do this. For portfolios we manage, we ensure that wash sale rules are followed.
You can, however, purchase a different investment if you want to stay invested. If you have a concentrated position in just one stock or fund, you can reinvest the proceeds from the sale into a different investment. This can help rebalance your portfolio and completely avoid the wash sale issue, giving you better long-term diversification.
Cost-basis reporting. It’s important to keep accurate records of your investment purchases, especially if you purchased the same investment at different times. Cost basis is the price you paid for the investment, and it’s important for calculating the amount of tax loss you can claim.
Again, we provide cost-basis reporting for portfolios that we manage. If you have investments that you purchased prior to working with us, you will need to provide us with the cost-basis information for those investments.
Limits on the upside of losses. If you’re single or a married couple filing a joint return, you can claim $3,000 per year on losses to offset your taxable income. The limit is $1,500 if you’re married but filing separate returns. Keep in mind that if you have realized more than the limit amount for the year, you can still apply the excess losses to future years to use up the entire amount. The only caveat is that you must still be alive to claim the losses. Carryforward losses do not apply to estates, even if the individual had them at death.
Tax loss harvesting can be a powerful technique to take advantage of losses in a portfolio for tax savings. It is especially helpful if you can use the proceeds from the sales to rebalance your portfolio or add diversification to your asset allocation. Your advisor is available to help you decide if tax loss harvesting can be a way to “turn lemons into lemonade” during volatile market conditions.
Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. This document may contain forward-looking statements including statements regarding our intent, belief or current expectations with respect to market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside Mercer Advisors’ control. Mercer Advisors is not a law firm and does not provide legal advice to clients. All estate planning documentation preparation and other legal advice is provided through its affiliation with Advanced Services Law Group, Inc.
Learn more about connecting the dots of your financial life.
All investing involves risk, including the possible loss of principal. Portfolio management strategies such as diversification, asset allocation, and rebalancing do not ensure a profit or guarantee against loss. There is no guarantee that any investment strategy will achieve its objectives. Mercer Advisors is not a law firm and does not provide legal advice to clients. All estate planning document preparation and other legal advice are provided through Advanced Services Law Group, Inc. Mercer Advisors Inc. is a Delaware corporation and is in no way affiliated with Mercer LLC, Mercer Investments, or the Marsh & McLennan Companies. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Terms & Conditions | Privacy and Security Center | Firm Brochure Adv Part 2A | Form CRS.
©2023 Mercer Global Advisors Inc. All rights reserved.
If you have questions related to our terms and conditions please email [privacy (at) merceradvisors (dot) com]. This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.