How to lower your taxes using tax harvesting before the end of the year

As the end of the year approaches, now may be the time to see if loss recovery can help lower your 2023 taxes. If you’ve ever turned on the TV or checked the news, you know that nearly every part of the stock market fell in 2022.

Meanwhile, 2023 was another highly volatile year, despite many people making decent returns across their investment accounts. Even if your portfolio has risen significantly over the years, there may be some losers within it. Or maybe the current value of the Big Winner’s shares is less than what you paid. Implementing a loss recovery strategy can reduce your overall tax bill, or at least minimize taxes on investment gains.

Limits of tax loss collection

Each year, investment gains and losses are offset to determine taxable profits. Capital gains are divided into short-term gains (holding stocks for less than one year) and long-term gains (holding stocks for more than one year). If you have more short-term losses than gains, you can deduct up to $3,000 from your ordinary income. Any remaining losses beyond this amount can be carried forward into the future.

This applies only to non-retirement accounts. Accounts like 401(k)s, traditional IRAs, and Roth IRAs are tax-deferred. You only need to pay taxes when you initiate a withdrawal.

When it comes to state taxes, loss collection rules vary depending on where you live. for example, California taxes capital gains as regular income. So, as a financial planner in Los Angeles, tax loss recovery can be very valuable to me. California tax planning clients. California has the highest marginal tax rate, peaking at 13.3%. If you live in a high-tax state, you should make sure your financial advisor also offers tax planning. The tax savings are too great to ignore.

Tax loss harvesting and wash sale rules

Tax collection may take some time, but in most cases, especially fiduciary financial planner We help you and your investment account provide free trades. In the past, recouping tax losses was often most beneficial to wealthy investors, given transaction costs. Without significant transaction costs, even small investors can save several dollars a year in taxes through loss recovery.

The main thing that trips people up when implementing tax collection is the wash sale rule. Wash sale rules prohibit investors from selling an investment for a lower price and then repurchasing the same or “substantially identical” investment at a loss within 30 days before or after the sale. If you do not follow the wash sale rules, you may lose the tax benefits of a tax loss harvesting sale.

More from Forbes5 steps anyone can take to become a 401(k) millionaireby david ray

Tax losses can be collected throughout the year

Although I am writing about missing harvests as the end of the year approaches, missing harvest trading can be done at any time of the year. As we have seen over the past few months, the tax benefits of loss recovery are typically most valuable when stock markets decline significantly. Hopefully, you’re working with a great financial advisor who can provide you with aggressive tax planning. Hopefully they will take care of the tax loss harvesting for you. You won’t have to think about it because you’ll get the tax benefit when you file your taxes next year. If you’re not sure whether your financial advisor is recovering tax losses for you, ask.

Shouldn’t stocks be bought low and sold high?

If all investments only went up, stock market returns would be much lower than they have historically been. Even if you have a great portfolio and great timing, the value of your investments will still fluctuate. The general trend is to buy low and sell high. Goals when investing, selling some stocks to achieve tax savings can be a wise choice to sell investments that have declined in value. For example, let’s say he owns 1,000 shares of Apple stock.
AAPL
If you buy shares, you can sell 100 shares that are worth less than what you paid for them. He would keep the majority of his investment in his Apple stock while getting tax benefits. You can also purchase an additional 100 shares within 31 days if you wish.

Tax loss recovery has been around for quite some time and has been used by the ultra-wealthy. Technology and lower transaction costs have made it easier to implement this tax minimization strategy, significantly reducing time and costs. Recovering losses helps increase your net investment return after tax without taking on additional risk. Is there anyone who doesn’t like tax savings?