How Tax Loss Harvesting Helps You: What is tax loss harvesting? How can it help you? Jae Oh, author of Maximize Your Medicare, explains tax loss harvesting.

Tax loss harvesting is an investment strategy used by investors to minimize taxes by selling investments that have experienced a loss and using those losses to offset taxable gains or income. The strategy involves strategically selling investments at a loss to realize capital losses, which can be used to offset capital gains realized elsewhere in the portfolio or to reduce taxable income.

Here’s how tax loss harvesting works:

Identifying Investments with Losses: Investors review their investment portfolio to identify securities that have declined in value since they were purchased. These investments are referred to as “losers” because they are currently worth less than their purchase price.

Selling Investments at a Loss: Investors strategically sell the losing investments in their portfolio to realize capital losses. By selling the investments, investors “harvest” the losses, locking in the lower value of the securities for tax purposes.

Offsetting Gains or Income: The capital losses realized from the sale of the losing investments can be used to offset capital gains realized elsewhere in the portfolio during the same tax year. If the total capital losses exceed the total capital gains, the excess losses can be used to offset other taxable income, such as ordinary income, up to certain limits.

Reinvesting Proceeds: After selling the losing investments, investors may choose to reinvest the proceeds in similar but not identical securities to maintain their desired asset allocation and investment strategy. Alternatively, investors may wait for a period of time before reinvesting the proceeds to avoid the wash-sale rule.

Wash-Sale Rule: The wash-sale rule is a provision in the tax code that prevents investors from claiming a tax deduction for a security sold at a loss if they repurchase substantially identical securities within 30 days before or after the sale. To comply with the wash-sale rule, investors may need to wait at least 31 days before repurchasing the same or similar securities.

How Tax Loss Harvesting Helps You. Tax loss harvesting can help investors reduce their tax liabilities and improve after-tax returns on their investments. By strategically realizing losses and offsetting gains or income, investors can effectively defer or minimize taxes, allowing them to keep more of their investment returns. However, tax loss harvesting requires careful planning and monitoring of the tax implications, as well as consideration of transaction costs and investment objectives. It’s advisable for investors to consult with a tax advisor or financial planner to understand your options.

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