In my last post, I confided in you my feelings on paying taxes, shared a tip for how to potentially pay less this year, and promised another word to the wise. So here’s tip #2: take advantage of tax loss harvesting.
What is tax loss harvesting?
Tax loss harvesting is purposefully selling an investment at a loss.
How on earth could that help? Because the government taxes you on your total gains for the year, you can use losses in one part of your portfolio to offset gains in another, and reduce your total tax bill.
This technique can make a difference in your tax bill and on your long-term returns. The federal government currently taxes long term capital gains (from the sale of investments held more than 1 year) at a rate up to 23.8%, and short term capital gains at an individual’s ordinary income tax rate. This year, the highest income tax bracket is a whopping 43.4%*.
According to the IRS, you can also carry your losses forward indefinitely. So make sure you’ve used up all of your losses from prior years (2008 is a good place to start!) to make sure you’re not leaving some losses on the table.
Where should I look in my portfolio this year?
Check your monthly statements to see where you’re at a loss or gain. US stocks have had a good run this year, but this list of the Six Worst S&P 500 Stocks of 2013 proves that not all stocks are winners.