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Harvesting: Not Just for Farmers

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Updated June 15, 2022

Brandon Hellenbrand, Portfolio Manager

How tax-loss harvesting can help you maximize your after-tax returns

Sometimes the best way to grow your investments is to harvest them. You can reap the benefits of your labor by taking advantage of tax-loss harvesting. Tax-loss harvesting is the process of selling investments at a loss in order to offset gains realized from other investments— either in the current year or in future years. It’s essentially a strategy that may help reduce your tax liability and possibly even strengthen your portfolio.

Whether it is because of a market downturn or just an underperforming investment, investment losses can and do occur. Tax-loss harvesting is using the realized loss to reduce taxable gains from other investments, potentially reducing your tax liability, or bringing you to a lower tax bracket.

The term itself can sound daunting to someone who’s not heavily involved in their investments, but tax-loss harvesting can really benefit anyone who has assets invested in a taxable account— regardless of the size of their portfolio. The only caveat is that tax-loss harvesting can be applied to taxable accounts, but not to tax-deferred accounts, such as an IRA or a 401(k) or to non-taxable accounts.

Trust the Process

When we work with clients, we want to be sure they understand that selling an investment at a loss doesn’t have to be a bad thing. Tax-loss harvesting offers a silver-lining to those losses. If a client has an investment that is losing money, we may sell that investment and use the loss to reduce taxable gains on other investments in the client’s portfolio.

Tax-loss harvesting is a strategy that may help reduce your tax liability and possibly even strengthen your portfolio.

The investor can potentially use up to $3,000 of the losses harvested to reduce ordinary income in the current year. If the losses are greater than $3,000, they can continue to use the losses as a tax benefit in future years. The IRS sets the $3,000 limit which, is also dependent on the investor’s tax-filing status. Even if you don’t have capital gains to offset, you may still be able to use the loss to reduce your tax liability.

Selling investments at a loss can not only offer a tax benefit, but often times we can reinvest the funds into a different investment that may align better with your asset-allocation strategies and investment goals.

Investing with a Purpose

Tax-loss harvesting can be a complex concept not fully understood by investors — making it easy to ignore or overlook. The nice thing about working with a company like Trust Point is that tax-loss harvesting is a part of our normal investment review process.

We’ll look for those opportunities for you and identify specific accounts where tax-loss harvesting makes sense on a regular and proactive basis. That means you won’t have to worry about it or monitor it throughout the year.

Our goal is to make it as easy as possible for our clients. Like with any tax-related topic, there are certain rules and limitations. This is just one example where our expertise is your financial advantage. Contact us if you have questions.

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Brandon Hellenbrand, Portfolio Manager