Tax-Loss Harvesting - A Tax Planning Strategy

Possessing more than a decade of experience in the financial services sector, North Andover, Massachusetts, resident Lucas “Luke” Noble leads Noble Financial Group as the owner and chief executive officer. With a dedication to helping people and businesses with financial matters, Lucas Noble of North Andover is knowledgeable about tax planning. An essential part of financial growth, tax planning involves logically analyzing your financial situation to decrease your tax liability. When investments are a factor, tax-loss harvesting is one form of tax management or planning.

Tax-loss harvesting (TLH), also known as tax-loss selling, is a tax-savings strategy typically implemented toward a calendar year’s end, although it may occur at any time. With this approach, an investment is sold prior to the close of the tax year for a loss. Doing so reduces a person’s tax liability because it offsets capital gains resulting from a fruitful investment of the same type or the profitable sale of securities. In this manner, it is also possible to offset non-investment income up to $3,000.

Tax-loss harvesting can only be applied to taxable investment accounts that are subject to capital gains taxes. These do not include 401(k) accounts or individual retirement accounts (IRAs) because these grow tax-deferred. Investments used in tax-loss harvesting comprise ones with diminished value that are already losing the investor money or underperforming. Additionally, the sold asset is replaced with a similar one. This helps the portfolio maintain its asset allocation and expected return levels.