Clock 2016

What is ‘tax loss harvesting’ and should I do it? You only have until 12-31 to decide!

It has been said, ‘When life gives you lemons, make lemonade’.  If you have a diversified investment portfolio, you probably have a few investments that are worth less than you paid for them.  If you own these in a taxable account (not a retirement or IRA account), here’s a strategy that may reduce your tax burden…but you must do this by 12-31 (Thursday).

Simply stated, sell your securities that are at a loss.  This will turn those unrealized losses (lemons) in to realized losses (lemonade).  Realized losses are generally deductible on your tax return; unrealized losses are not.  Consult your tax advisor to be sure.

As simple as that sounds, we never recommend an investment strategy only for tax purposes.  So here is the rest of the story.  We simultaneously buy a similar security with the proceeds from the sale.  This insures that we maintain the original asset allocation.  And after 30 days*, we sell the replacement security and buy back the original investment we owned.

This strategy works particularly well for investors who sold securities at a gain earlier in the year.  It also works well for investors who own mutual funds that are paying out sizeable capital gains in 2015.  Be sure to assess your situation this week…but hurry, you only have until Thursday, 12-31 to implement this strategy.

*to avoid the ‘wash sale’ rule.  See IRS Publication 550 for detailed explanation

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