Investors get very frustrated when the stock market goes down. However there is happy news when the situation you are faced with is not so happy and is gloomy. There is an option that an investor can use to boost after tax stock returns. This is a concept called tax loss harvesting. There is also what is known as opportunistic tax loss harvesting which will allow you to increase your returns indirectly. This can be helpful early on in the life of a portfolio. The article below will explain what all of this means and how you can benefit from the extra return to help maximize your wealth.
What is Tax Loss Harvesting
If you were to invest on the first day of the year $100,000 into the US stock market through what is called the exchange-traded fund (EFT). An example of this would be the SPDR S&P 500. F the EFT traded off by ten percent this would leave your investment at $90,000. When this happen many people will call it quits and move on. However what you should do instead of feeling sorry for yourself is to reinvest the $90,000 that you still have back into the stock market.
By doing this you will keep market exposure but for the IRS tax purposes you just realized that you had a $10,000 loss. The benefit you will find here is that by using this loss to offset taxable income you may be able to increase your tax savings or even a larger refund amount.
The good news is that if you increase the amount of money you have invested you will have a capital gain and you can still increase the amount of tax savings you may have as well as your tax refund.
Of course as with any activity there are limitations. The IRS has its own set of regulations. They will not let you buy an asset and sell it with the sole intent of paying less in taxes every year. This is why on the Schedule D of the 1040 tax form there is a section where the loss will be disallowed if the same asset was also purchased within thirty days. This is known as the wash sale rule.
Another regulation is income threshold. What this means is that only up to the amount of $3000 of a loss can be used to reduce your taxable income. Even though there is not a revision of this in the works the high net worth investors have gains within other investments that make this tax loss useful in their finances. There is the benefit that a tax loss may be used on your future tax returns which will allow for a shorter time period for the value of your money during the tax loss.
As an investor you will also need to factor in the administrative cost. When preparing your taxes if you make a transaction every time your stock market value goes down this can be a nightmare to the person who is preparing your taxes for you. This might even cost you more money in the long run. There is a rule to follow and that is that if the tax benefit is starting to become more than the administrative cost you should just harvest the loss.
There are many benefits when investors take an active role to manage their own financial portfolios. Of course the benefits will make their appearance when the tax laws and not the speculation of what is going to happen within the market create the strategy that is being used. As usual if you have any questions you should contact a tax professional.
Image credits to : Perry Gerenday