Tax loss harvesting is a strategy used by taxpayers, including high-net-worth individuals, to reduce their overall federal tax liability. This type of tax planning can be used to offset capital gains taxes, which can help maximize returns and minimize the amount of taxes owed. In this blog post, we’ll take a closer look at what tax loss harvesting is and how it works.

What Is Tax Loss Harvesting?

Tax loss harvesting is the practice of selling investments that have experienced losses in order to offset capital gains taxes. By doing this, investors can reduce their taxable income and save money on their taxes. It’s important to note that this strategy should only be employed after: (1) speaking with a financial and/or tax advisor, and (2) considering certain factors, such as: the amount of your investments and your overall investment strategy.

How Does It Work?

The process of tax loss harvesting begins with identifying which investments have experienced losses over the course of the year. Once those investments have been identified, they must be sold so that the losses can be realized and then used as a deduction against other capital gains in the same year (or in future years). For example, if an investor has $50,000 in taxable gains from stocks and $20,000 in losses from bonds, they can sell all or part of their bond portfolio to realize those losses and reduce their taxable gain down to $30,000 for the year. This process of "harvesting" losses can be done across multiple asset classes, including: stocks, bonds, and real estate.

The Benefits for High-Net-Worth Individuals

High-net-worth individuals have unique tax considerations that require specialized strategies to optimize their portfolios. This is where tax loss harvesting comes into play. By strategically selling investments at a loss, high net worth investors can reduce their overall taxable income and minimize their exposure to taxes on capital gains. Additionally, by limiting the amount of taxable income generated from investments, investors can also save on various taxes such as the 3.8% Medicare surtax (or net investment income tax) or state taxes like California’s 13.3% top rate on personal income over $1 million per year for individuals.

For high-net-worth individuals with complex portfolios, tax loss harvesting may sound complicated—but it doesn't need to be. With the right financial advisor and/or tax advisor on your side, you can take advantage of this powerful strategy without having to do all the work yourself. An experienced professional will be able to guide you through the process and make sure you get the most out of your investments while minimizing your exposure to taxes on capital gains.

Conclusion

Tax loss harvesting is an effective strategy for reducing taxable income for high-net-worth individuals with complex investment portfolios. By strategically selling certain investments at a loss in order to offset capital gains from other investments, investors can enjoy significant savings when it comes time to pay taxes on their earnings. With the right advisor by your side, you can take advantage of this planning strategy, as well as other strategies, to put you in the best overall financial situation.

Make an appointment for a free consultation to speak with the Provident Financial Planning team of Certified Financial Planner™ and CPA/JD tax experts, so we can advise you on how to implement an investment and tax strategy that is tailored to you.

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In His Name,

Zachary J. Montgomery, JD, CPA, CFE

zachary@providentfp.com