Login to your account

Lost your password?

Tax Loss Harvesting: How to limit your tax liability

There are few things people dislike more than having to pay taxes.  Investors are no different in that regard, and perhaps even more so as it pertains to capital gains taxes.   When an individual goes to work, they know at the end of their work day that they will typically be paid based on specific formula of hourly wages or salary.   Investors often commit dollars to a specific opportunity with no guarantee of any return whatsoever.  In fact, the risk of a loss of some type is almost always a threat.  As a result, any opportunity to enhance the probability of success is paramount.  Tax efficiency is a key component of a well thought out investment plan.  Tax Loss Harvesting is one of the most important aspects of a tax efficient investment plan.

Capital gains taxes are levied at an investor’s ordinary income tax rate should they hold an investment for less than one year.   In the event that an investment is held for more than one year, capital gain rates can be levied at as much as 20%, as well as additional capital gain taxes levied at the state level.  Furthermore, another 3.8% tax on net investment income (which includes capital gains) may be assessed on individuals with an adjusted gross income over $125,000 ($250,000 for joint filers) due to legislation initiated with the Affordable Care Act.

When an investor loses money on a capital investment, they may report the loss on their income tax return as an adjustment against their ordinary income (wages/salary).  Presuming they have no capital gains in the year of the tax filing, they are permitted to utilize only $3,000.00, and carry the remaining amount forward into future tax years using $3,000.00 annually.   So if you bought a stock or lost money on an investment property, it wouldn’t matter if the loss is in excess of $100,000.00.  The total loss would take more than 33 years to realize!

Joe Favorito

Joseph Favorito is a Certified Financial Planner™ who began his career in the financial services field in 1997. Over the past two decades Joseph has worked for several New York stock exchange members. In 2011 he founded Landmark Wealth Management, LLC , a Long Island-based Securities Exchange Commission registered investment advisory firm.