It may be time to reap tax losses || Thomas Callaway

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Watching your investments tumble in the stock market is usually not a fun experience. But seasoned investors know that market volatility — and the ups and downs that come with it — is a natural part of the process, and that historical trends show that market swings even out over time.

Under the right conditions, a market decline can even present opportunities, such as with the harvesting of tax losses.

If this concept intrigues you – especially in light of recent stock market index declines – here’s what you need to know:

A Potential Tax Saving Strategy

The tax loss strategy applies specifically to investments held in taxable accounts. Since current taxes do not apply to IRAs or workplace retirement plans, this strategy does not apply to these accounts.

The tax benefit of selling a security in a loss position is that these losses could potentially reduce your tax liability. Suppose you invested $10,000 to buy 1,000 shares of a stock for $10 per share over a year ago. Today, if the stock value has dropped to $8 per share, your original investment is now valued at $8,000. The stock may recover and possibly increase in value. But if you sell it today, you could claim a long-term capital loss of $2,000. Is this the right choice?

The benefits of tax-loss selling

A deciding factor is whether you have capital gains that can be offset by the losses you incur by selling securities in a negative position. Long-term capital gains related to assets you’ve held for more than a year are taxed at rates of 0, 15 or 20% depending on your federal taxable income. If you had a long-term capital gain of $3,000 to claim on your 2022 tax return, that would come with a federal income tax bill of $450 if your long-term capital gain is taxed at the rate of 15%. If, at the same time, you lock in a long-term capital loss of $3,000 on a different investment, this will offset that gain and eliminate the tax payable on that capital gain.

Likewise, if you own mutual funds in a taxable account, they may pay capital gains distributions this year, even if they are not performing well at present. These gains may also be offset by any capital losses you claim.

Note that you may not need or want to offset capital gains if your taxable income in 2022, including gains, is $41,675 or less for single filers or a married taxpayer filing separately , or $83,350 or less for a married couple filing jointly. Taxpayers with total taxable income and gains below these income thresholds are entitled to a 0% long-term capital gains tax rate.

Single and married couples filing jointly can use up to $3,000 of net capital losses to offset ordinary income ($1,500 for a married filer, filing separately). Beyond that, unused losses can be carried forward to offset potential taxable capital gains in future tax years.

Cautions regarding tax-loss selling

The downside to selling a position that has suffered a loss is that you cannot buy that specific security or a security that is “substantially identical” to it 30 days before or after the loss sale without the ability to go against washing. selling rules and loss carry forward. Choosing to sell also means that you are sacrificing the potential to benefit from a rebound in the security’s price while you are out of position. You want to be certain that you are comfortable not holding a specific security for a period of time that could be a candidate for tax loss harvesting.

Importantly, any buying or selling decision you make regarding your portfolio should go beyond just tax consequences. Discuss with your financial advisor how tax loss harvesting opportunities fit into your overall financial plan. Also be sure to consult your tax advisor to understand how the tax rules apply.

Thomas A. Callaway CRPC®, is a financial advisor at Ameriprise Financial Services, Inc. in Paris TX. He specializes in fee-based financial planning and asset management strategies and has been practicing for 29 years. To contact him you can go to www.ameripriseadvisors.com/thomas.callaway or call (903)785-7000, office located at 2219 Lamar Ave Paris TX 75460.

Investment advisory products and services are made available through Ameriprise Financial Services, LLC, a registered investment adviser.

Investment products are not insured by the FDIC, NCUA, or any federal agency, are not deposits or obligations of, or guaranteed by, any financial institution, and involve investment risks, including possible loss of capital and a fluctuation in value.

Ameriprise Financial and its affiliates do not provide tax or legal advice. Consumers should consult their tax advisor or attorney regarding their particular circumstances.

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