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Tax Loss Harvesting

Take advantage of stock losses with this tax strategy

This is a quick intro to tax-loss harvesting. If you’re aware of this strategy, skip ahead and I’ll see you next week! For a bit of a primer read on or watch the video.

Tax Loss Harvesting is a way of using unrealized losses in your portfolio to your advantage: making lemonade out of lemons. If you have a stock, ETF or mutual fund in your brokerage account that has gone down, then you can sell that asset and realize a capital loss. The generated loss can then be used in a couple of different ways.

  1. You can use the loss to offset up to $3,000 of ordinary income for tax purposes, therefore reducing your AGI by three thousand dollars. This works really well, especially for high-income earners who then can save over $800 in taxes for the year. Bueno!

  2. You can offset any realized gains in your portfolio. This is especially useful for short-term capital gains which are taxed at ordinary income marginal tax rates. For instance, if you have a short-term gain of $5,000 and a long-term loss of $5,000 - they offset and you don’t pay any taxes on the short-term gain. Another big savings.

While tax-loss harvesting is a great tool to use each year, it’s lower-priority than having the right savings rate, asset allocation and sticking to your financial plan. Don’t get too enamored with a single strategy: it has a place in the toolbox, but it’s not a driver of financial success.

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  • Michael Lewis, the author of Moneyball, The Big Short and other best-selling books, has a new podcast called Against the Rules. The second episode, The Seven Minute Rule, was eye-opening on the practices of student-loan servicers: how they are looking out for their own interests, not the people they serve. Just wow. It’s a must-listen.

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