Consider Tax Loss Harvesting for Additional Return - Prentice Financial Planning, LLC

The markets, represented by the S&P 500, had a wild ride last week, dropping over 10% for the first time in a while. Even though no one enjoys these dips they can provide a tax opportunity through a strategy called tax loss harvesting, which has been shown to provide an additional return of .3%¹. Tax Loss Harvesting is the process of purposefully selling investments that have a loss in order to either use that loss to cancel out gains, or use up to $3,000 of the loss in order to reduce your taxable income. When executing this strategy you need to make sure you follow some simple rules. 1) The investment you sell cannot be purchased back for 30 days. This is called the 30 day wash sale rule. In order to circumvent this rule we will sell an investment and then instantly buy a similar investment in order to keep the portfolio at its correct balance. Once 30 days has passed we can then buy the original investment back. 2) Make sure your trade costs don’t exceed your tax savings. In order to accomplish this we usually put a minimum loss at around $2,000. This ensures that the trade costs of selling and buying during the process don’t wipe out any savings in taxes. We also use a minimum because your tax preparer will usually charge by the form. I have witnessed some advisors, and most recently online robo-advisors, that will trade these losses daily no matter their size. This could cause your tax preparer to need to do countless forms, and their fee would eat away at any benefit. 3) Tax Loss Harvesting should only be used in non-retirement accounts. This strategy is one of many that can be used to reduce your taxes or fees in order to net you the highest possible return.

¹Blanchett, David, CFA, CFP® and Paul Kaplan, Ph.D., CFA, 2013. Alpha, Beta and Now…Gamma.https://corporate1.morningstar.com/uploadedFiles/US/AlphaBetaandNowGamma.pdf

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