This week’s MoneyDo encourages you to take part in a key component of wealth management – evaluating gains and losses. Don’t let the crush of have-to’s and shopping lists crowd out this critical “MoneyDo.”
For many newer investors, it takes some time to understand why or how a realized loss could be a tool in your financial toolbox. Some DIY investors find it too complex a task to evaluate losses and gains while considering tax consequences.
After the volatile year we’ve experienced, you should expect to discover that your holdings are in a much different position than they were in 2017.
Despite potential complexities, evaluating gains and losses should be part of your end-of-year MoneyDos. The evaluating process incorporates two critical year-end parts of managing your portfolio:
- Considering tax implications as you get ready to file taxes
- Reviewing the risk you’re taking in your portfolio and considering adjustments, if needed
Some considerations as you realize gains:
- Long term capital gain tax rates are different than ordinary rates. Depending on your situation, they may be 0%, 15%, 18.3%, 23.8%.
For single individuals, once your taxable income starts to exceed $38,700, your long term capital gains over that threshold would start to be taxed at 15%, increasing as income gets higher.
For married folks with taxable income lower than $77,400, your long term capital gains for federal taxes may be taxed at 0%.
- If you’re on Medicare, be aware of increasing your income too much and potentially subjecting yourself to a higher monthly premium at a later date.
- As mentioned before, this is a great time to review what you hold, and look at rebalancing your portfolio, including considering your mix of assets, as well as considering if they’re in line with your risk tolerance.
- If you’re realizing short term gains (on holdings you owned less than 365 days), your rates would be higher, and mirror that of your current ordinary income rates.
Sometimes a tax loss can be used to improve your tax picture. If your year saw realized gains that could potentially bring you into a higher tax bracket, realizing a loss can sometimes reduce what you’d pay in taxes.
Things to consider before realizing losses:
- Do you already have suspended realized losses on your tax return? If so, you may not receive additional tax savings by realizing more.
- You can’t sell something, count the loss, and then buy it back right away. There are “wash sale” rules which would not allow you to realize a loss if you would buy back the security immediately following the sale. You would need to wait 31 days before buying the security back.
- Make sure to consider if you’d leave the funds in cash after realizing a loss, or if you’d be reinvesting the proceeds into a different type of security.
- You can only take a tax deduction for $3,000 per year of net capital losses. The remaining gets carried forward into future years. So if your loss exceeds $3,000, you can only declare a maximum of $3,000 per year.
- Your losses can offset other capital gains, to the extend you have gains. Then, with the remaining losses you are limited to the $3,000 deduction.
If you’re worried about the tax implication of realizing some gains/losses, be sure to review you projected 2018 income before selling.