5 Smart Tax Loss Harvesting Tactics Before Year End

If you sold any long-term assets this year you could be staring down a 20% tax on the gain unless you take corrective action. And if you pull down high income, it gets worse. The IRS can slap on another 3.8% tax for good measure. That’s going to leave a mark friend.

Fortunately there are a number of tactics you can use to reduce or eliminate this tax burden. Here’s how:

1. Play The Down Low

If you are in the 15% income tax bracket or less you don’t have anything to worry about. People in that group have a ZERO long-term capital gains tax rate. In 2013, a couple earning $72,500 or a single earning $36,250 or less (including the capital gain) would pay no tax on long-term capital gains. That’s sweet.

2. Better To Give And Receive

If you aren’t in that tax bracket but your loved ones are, now might be a great time to make a gift. Gift them the appreciated asset and let them sell it. If you set it up right, they won’t pay any tax and neither will you. This might be a great way to provide the support you were providing for someone anyway and get a nice tax benefit for your trouble.

3. IRA Withdrawal Tactics

Another way to play this 15% theme is to keep your own tax bracket as low as possible. I know that you don’t have complete control over your bracket. But there are some smart tactics you can use to keep you’re your taxable income low.

For example, if you are using your IRA to supplement your retirement income, try to keep your distributions to a minimum. If you need more than the RMD, try to tap your non-retirement accounts first. That’s because distributions from non-retirement accounts won’t necessarily trigger a taxable event.

4. Go Hunting For Losses -101

If the steps above aren’t for you or aren’t enough, do some “loss harvesting”. This is simply selling an asset that has a built in loss you can use to offset other gains you are about to report.

Before you go this route call your CPA. Ask her if you have unused losses from years past that you can use now to offset the gains you are worried about. This could solve your entire problem without you lifting a finger or selling anything else. Cool as a cucumber.

5. Loss Harvesting – 201

If you don’t have old losses on the books, take a look through your portfolio. If you are sitting on a long-term asset that is worth less today than its cost basis, think about selling and locking in those losses to use against the pesky gains you are bothered about.

The caveat here is that you can’t buy back the asset you sell within 30 days or you’ll create a “wash sale”. If you create a “wash sale” you won’t be able to use the loss against your other gains.

Let’s say you think the investment in question is about ready to rebound. You want the tax benefit of selling but you don’t want to sell out and miss the recovery. You feel torn. Not to worry my clairvoyant Pilgrim. Here’s a snappy solution.

Buy something similar to the asset you sell. There is tough to do with individual stocks but it’s a snap with mutual funds. There are all kinds of ETFs and index funds you can use. Generally speaking, all funds rise and fall with the market. If the fund you are about to sell is about to skyrocket, it won’t be the only fund in the universe that is about to do well. This is just about the closest thing there is to having your cake and eating it too. Enjoy.

Capital gains tax is another way to exercise your financial power and prowess. Talk to your tax professional. Consider these and other steps to cut your capital gains tax. Once you’ve done everything legally possible, let it go. Don’t worry about the tax you are stuck paying. Why worry about stuff you can’t do anything about?

Are you uptight about long-term capital gains this year? What are some other tricks and tips that might help the other Pilgrims out there?