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Tax-loss harvesting turns losses into gains. Here’s when to skip it

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When the stock market dips, a technique generally known as tax-loss harvesting could be a silver lining. But it surely doesn’t make sense for all portfolios, financial experts say.  

Here’s how tax-loss harvesting works: You possibly can sell declining assets out of your brokerage account and use the losses to offset other profits. Once losses exceed gains, you may subtract as much as $3,000 per yr from regular income. 

Tax-loss harvesting may now be more attractive with the S&P 500 Index down by nearly 14% since January’s all-time high. Nonetheless, there are scenarios where it’s higher to steer clear on this strategy.

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One popular move involves selling a losing asset and replacing it with something just like rating a tax break while keeping the unique portfolio exposure. 

Nonetheless, this so-called wash sale rule bars that loss should you buy a “substantially similar” investment throughout the 30-day window before or after the sale, in response to the IRS.

It might be higher to think about skipping tax-loss harvesting should you cannot discover a “good equivalent alternative,” said certified financial planner Matthew Boersen, managing partner of Straight Path Wealth Management in Jenison, Michigan.

While it could be easier to search out alternative exchange-traded funds or mutual funds, selling individual stocks requires you to “sit on the sideline for the following 30 days,” he said.

“The market can move lots during this time,” said Kristin McKenna, a Boston-based CFP and managing director at Darrow Wealth Management. You might potentially “wipe out the tax advantages of harvesting losses” by selecting one other stock, she said.

“It is vital to think about the role of funds in an asset allocation and the way selling different securities may impact risk,” McKenna added.

Zero percent capital gains

What’s more, in case your income falls below certain thresholds, it’s higher to take profits from assets owned for a couple of yr, generally known as long-term capital gains, somewhat than losses, explained Larry Luxenberg, a CFP and founding father of Lexington Avenue Capital Management in Latest City, Latest York.

If you may have taxable income under $41,675 for single filers and $83,350 for married couples filing together in 2022, you are within the 0% bracket for long-term capital gains.

You calculate taxable income by subtracting the greater of the usual or itemized deductions out of your adjusted gross income, that are your earnings minus so-called “above-the-line” deductions.

“You might actually need to take gains should you’re still within the zero capital gains rate,” Luxenberg said.

If you’re within the 0% bracket, you may sell profitable assets, avoid paying long-term capital gains taxes and repurchase the identical investments for a so-called “stepped-up basis,” which adjusts the acquisition price to the present value, securing lower taxes in the longer term, he said.

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