I don’t think I’ve ever met anyone who enjoys paying their taxes. However, there is probably someone out there that does. From my experience, most individuals try to limit their tax liabilities. When investing, they create strategies that allow for the most efficient net returns (less taxes, fees, and any additional costs). I discussed this in a previous post about Asset Location vs. Asset Allocation. Asset location strategies allow for tax-efficient placement (types of accounts) of your investments, and asset allocation focuses on the types of investments. For more information about these strategies and how they could fit your goals, consult one of our advisors.
In today’s discussion, we’ll explore two strategies that expand on asset location to mitigate the tax liability within an investor’s portfolio.
Tax Loss Harvesting
For this section, I’ll direct you to a blog post by John-Mark Young. In this article, he breaks down tax loss harvesting and provides a great example of how this can impact investors. Take a few minutes to read here and take notes on Suzie’s steps to accomplish this task: BEAR MARKET STRATEGY: TAX LOSS HARVESTING (whitakerwealth.com)
Tax Gain Harvesting
On the other hand, tax gain harvesting is another tactical tool investors can employ to limit the tax liabilities from gains. Tax-gain harvesting occurs when an asset is sold, but the sale is specifically for tax purposes. The question is, how is this different from the sale of any asset? The focus here is when the asset is being sold to limit potential higher tax implications in the future. Factors to consider when conducting tax gain harvesting:
Harvest during ‘lean years’ Years where the investor is between jobs or a smaller bonus, essentially when the investor is in a lower income tax bracket
Long-term capital gains vs short-term capital gains Understanding what category the investment lands in impacts the amount of tax paid
Net Investment Income Tax (NIIT) Depending on filing status and adjusted income, the investor may be charged an additional 3.8% in tax
Reset the basis by rebuying the same security This option is not available when you’re harvesting losses - Wash rule (see John-Mark’s blog post above)
Only on taxable accounts Does not include pre-tax retirement accounts
To harvest or not, it’s not always a farming question!
At the end of the day, managing your tax liabilities efficiently needs to be a part of your wealth-building and investment planning. Our team of financial advisors at Whitaker-Myers Wealth Managers has the tools needed to align your strategic goals with your desired outcome. If you don’t have a financial advisor, reach out to ask questions and schedule a meeting today.
Taxes, it’s not really a love-hate relationship, is it?
July 22, 2024
Summit Puri
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