Quick Tips for Year-End Tax Loss Harvesting

Written by First Foundation Advisors | 11/29/22 7:08 PM
3 minute read

You have likely heard it before: Year end is an important time for your finances. But what you might not appreciate is how easy some of the steps are to make real change, particularly as it relates to minimizing your tax burden. There is a limited window for taking some important steps to minimize your taxes for the current year and set you up for success in the coming year. Below are some key steps to consider for your year-end planning:

  1. Understand your starting point. What is your net capital gains position right now? Are you sitting on a net short-term capital gain? Maybe not in this market, but some clients are actually in this rare situation. Remember, short-term capital gains are taxed at your ordinary income tax rates, but short-term or long-term losses can offset the short-term capital gain. Losses must first offset gains of the same type before they can be applied to gains of a different type. 
  2. Incorporate capital gains distributions from mutual funds. Understand the magnitude of your capital gain distributions from any mutual funds and make sure you harvest enough capital losses to offset these gains as well. Consider whether it makes sense to sell a mutual fund before the distribution is paid.
  3. Beware of the wash sale rule. If you purchase the same, or a "substantially identical" investment within 30 days before or after the sale of the security generating a loss, you will void the loss. “Substantially identical” may be tricky since there is no formal definition provided by the Internal Revenue Service.
  4. Use losses against ordinary income. Up to $3,000 in net capital losses can be used against other ordinary income (e.g., wages, taxable interest, IRA distributions, etc.) in any given year. 
  5. Don’t be afraid to generate more losses than you need this year. You can carry over the excess (above the $3,000 previously mentioned) into future years, and they won’t expire until you do.
  6. Specifically identify. Use the specific identification method of selling your investments to control the desired tax result. If you are selling less than an entire position and some of your lots have gains and losses (i.e., they were bought at different times), then be sure to specifically identify and sell the lots with losses.
  7. Donate any long-term capital gains to charity. Some of our clients now have Donor Advised Funds to utilize. This generates a charitable deduction, provides unique control over philanthropic efforts and avoids taxes. 
  8. Consider investing in Opportunity Zones. Still have a gain after all of this? You can utilize an Opportunity Zone investment and defer your federal gains into this vehicle. Please consult your tax and investment professionals before investing.

Now is the time to take action. We go through this process with our clients starting in early Q4. Please let us know how we can help you with this type of tax-efficient wealth management.