With only a few weeks left in the year, it is a great time to think about doing everything that you can to save money on taxes for this tax year. As an investor, if you have accounts that are not retirement accounts, you might be able to save significant money on taxes by employing a tax harvesting strategy. The accounts that I am referring to are trust accounts, TOD (transfer on death) accounts, joint accounts, or individual non-retirement accounts. Tax harvesting is a strategy that we have employed for a number of years for our clients at Metcalf Partners Wealth Management. Below is what Tax Harvesting is and why we do it.
What tax harvesting is:
Tax loss harvesting is the practice of selling a security that has experienced a loss. By realizing, or “harvesting” a loss, investors are able to offset taxes on both gains and income. The sold security is replaced by a similar one, maintaining an optimal asset allocation and expected returns.
It is important to note that when investing in mutual funds, it is common for a mutual fund to have a positive return during a given period of time and still show a “tax loss” for the period. This is due to the fund paying dividends and distributions, but having the net asset value (trading price) of the fund depreciate a little bit. In short, the overall return is positive due to the income from the fund, but the price went down a bit, which creates a tax loss. This is very common in fixed income funds especially.
Why we tax harvest:
Particularly in a year such as 2019, when the market has experienced significant gains, tax harvesting can be very important. Many funds will be distributing gains to shareholders at the end of this year due to the positive returns yielded in underlying stocks/securities held in the fund. By temporarily selling a security at a tax loss, it will help offset capital gains distributions and up to $3,000 of capital loss can be used to offset ordinary income on your tax return.
As mentioned, this year could be a great year to tax harvest, and please don’t hesitate to reach out if you or someone that you know needs help building a harvesting strategy.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.