Reducing Taxes For Investors
Many investors start to figure out their taxes towards the end of the year instead of proactively planning ahead. Let’s look at how tax loss harvesting can both reduce your tax liability and help you get a head start what you’ll owe in April.
Tax loss harvesting consists of selling investments that have experienced a loss and applying a credit from that sale to the taxes on your other investments that gained value over the course of the year.
The strategy is beneficial in two ways. First, it let’s investors sell investments that are underperformed. And secondly, it allows them to use those losses to lower their tax liability on the investments that have done well.
Even if you do not have any gains offset this year, you can still use the tax loss harvesting strategy to offset the taxes applicable to your income and then carry over the remainder if any to the next year.
Note, this strategy is not limited to a small segment of investors or security holders , but in fact a sound and completely legal way for a large percentage of investors to reduce their tax burdens.
When deciding which investments to apply the tax loss harvesting credit, keep in mind the different tax rates that apply to short term and long term capital gains. Short term capital gains tax rates which apply to investments held for less than one year are higher that long term capital gains tax rate. Which applies to investments held for more than one year.
Therefore although tax-loss harvesting will reduce your tax, regardless of which type of investment it is, it most affects the one applied to investments that are subject to the short term capital gains tax that is investment that you’ve held for less than one year and under performing.
So as you monitor your investments throughout the year and consult with your legal financial and tax advisors, start evaluating which underperforming investments you may want to sell in order to take advantage of tax-loss harvesting. As always, if we can provide any legal assistance or if you have any questions, feel free to send us a message at email@example.com.