investment tax loss and what to do

Investment Tax Loss Harvesting, a Federal & NJ Approach

(The short as I could make it version)

If you have a taxable, non-retirement plan, investment account you should consider the power of harvesting investment losses. Why? To pay less tax, of course. Generally, you want to take the losses to offset other investment gains or create a tax-deductible loss. Some investment funds or software can do this “on purpose,” and you might be able to turn this feature on and off at will to arrive at the “loss figure” you planned on. There are funds and software available that can assist you with this method. To do this, a stock needs to be sold, which is currently in a loss status. Overall, you don’t really want to get out of this position because you should be investing for the long term. But they will sell it and replace the stock with another similar stock. So, ultimately you are in the same investing position. You just switched the stocks that cover that portion of your portfolio. But there’s always a catch. The stock can not be so similar that a “wash sale” occurs.

The IRS has figured out this strategy as well, not a surprise, and will not allow the sale of the stock only to repurchase the same stock 5 minutes later. Thus, the created loss will basically be avoid. So, the stock would have to be out of your portfolio(s) for 30 days. The investment fund knows this and or has software that will purchase a stock that avoids the wash sale rule but covers your portfolio position appropriately.

Note the losses have some limitations. You can offset the capital loss against other capital gains completely, but if your losses exceed the gains, you will be limited to a capital loss of $3,000, federal. If the amount goes over $3,000, they will be carried forward to the following year. However, the state, NJ, is not so kind. NJ will not allow a net loss. You are only allowed to offset the loss against other capital gains in that year for that year. NJ will not allow you to carry the capital loss forward either, so you will lose the loss, unfair but true. So, you will also have to weigh the NJ tax calculation into the equation as well. Also, NJ does not have a “capital gains” tax rate; it is taxed as income.

Tax-loss harvesting can be helpful in several different circumstances, and preplanning would be the best course of action. If you take the federal and NJ tax rate and calculations into account, this method could work out well for you, depending upon your income level.

As always, seek the advice of your financial professionals before implementing any method on your own.

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Ken Gibbons, CPA & CPFA