Taking a small loss for a bigger win
It’s not always a bad thing to lose money. Smart investors try to be strategic about how they do it, though.
The IRS lets you offset up to $3000 of your income annually with capital gains losses. This can be applied to future years too. Just look at last year’s tax return to see what you carried forward. While losing money on an investment is disappointing, you might find taking a small loss for a bigger win makes sense come tax time. Of course, that requires some smart planning.
Changes made with the 2018 federal tax code are still costing people money because individuals, and some professional providers too, don’t understand how much these can affect taxes owed.
Think about this – if your joint return in 2018 showed $77,401 in capital gains, you jumped from owing 12% to a whopping 22% on short term gains for that $1 over $77,400. That’s for all your gains, not just the money over the threshold amount.
In a situation like this, selling off some of your holdings for a loss could mean you keep a lot more money, provided you do it right.
Loans might be good places to take losses to offset income gains. Know, though, that income for typical borrowing is calculated on the bottom line of your tax return, so if you’re thinking of buying a house soon or borrowing money for another major purchase, take care of how you reduce income for the tax man. Losses carried year-over-year can make it difficult to get traditional financing. It doesn’t matter that these figures have nothing to do with your current income.
Sometimes booking a gain makes sense. Selling off an asset that has depreciated may be a lot cheaper in taxes for you than your beneficiaries. Loss benefits do not pass to heirs when you die. The IRS will get less if you can take losses, when possible, during your lifetime. Laws get complicated here so it makes sense to engage a professional for help.
Health insurance subsidies are something to consider too when claiming losses. Virginia doesn’t offer any for those who qualify for Medicaid support, whether you’re on it or not. Sometimes a little extra income can make a big difference in Marketplace offsets.
Taking advantage of losses and gains requires planning ahead. It’s too late to move money around once the year is gone. IRAs and some other areas are the exception, but it almost always pays to plan income and expense strategies prior to year-end. A little forethought can allow have you taking a small loss for a bigger win and smiling about it.
If your tax preparer and financial advisor aren’t working together, their advice may be costing you far more than their fees. At 360 Wealth Solutions, we put your financial advisors and tax preparers under one roof so they collaborate to ensure the best overall solutions to help you keep more of the money you’ve earned.
Call us today for a free consultation.