Today, we’re diving into an essential technique: Investment Loss Planning, and how you can use it to your benefit
Investment loss planning might sound complicated, but it’s a tool that can help you reduce your tax liability, and in turn, keep more of your hard-earned money. So let’s break it down!
Capital gains and losses play a vital role in your investment strategy, especially for Gen X & Gen Y. Let’s dive into these concepts to grasp how they affect your financial landscape.
What Are Capital Gains?
Capital gains are the profits you make when you sell an investment, like stocks, bonds, or real estate, for more than you paid for it. These gains can be classified as:
Short-Term Capital Gains: If you’ve held the investment for less than a year, it’s taxed at a higher rate, usually the same as your regular income tax rate.
Long-Term Capital Gains: If you’ve held the investment for more than a year, the gain is taxed at a reduced rate, which varies based on your income. Currently 0-20%
Understanding the difference between short-term and long-term gains is vital, as it affects the taxes you’ll owe.
What Are Capital Losses?
On the other side, a capital loss occurs when you sell an investment for less than what you paid for it. Like gains, losses can also be short-term or long-term, depending on how long you held the asset. But don’t view capital losses as merely a negative; they can be strategically utilized to offset capital gains, something we’ll explore later in this video.
How Capital Gains & Losses Impact You
Why do capital gains and losses matter? Here’s how they tie into your broader financial goals:
Tax Planning: Understanding how selling investments affects your tax liability helps you make informed financial decisions.
Investment Strategy: Aligning capital gains and losses with your investment strategy can enhance your portfolio’s performance.
Financial Flexibility: Leveraging gains and losses gives you more control and options in meeting your financial objectives.
Capital gains and losses aren’t just about numbers on a spreadsheet. They are essential components of your financial picture, influencing your tax planning, investment strategy, and overall financial flexibility.
By embracing these concepts, especially as business owners and high earners, you create a strong foundation to explore more advanced financial strategies and align your investments with your life goals.
This understanding sets the stage for investment loss planning, a powerful tool that can save you money on taxes and align your investments more closely with your financial aspirations.
The Concept of Tax-Loss Harvesting
Tax-loss harvesting is more than just a financial buzzword; it’s a strategic tool that can help you make the most of your investments, particularly if you’re a business owner or high earner who’s focused on aligning your money with your goals. Let’s break down what tax-loss harvesting is and how it can benefit you:
Definition and Purpose
Tax-Loss Harvesting: This strategy involves selling investments that are at a loss to offset gains in other investments. In essence, you’re using the losses from one part of your portfolio to reduce the taxes on the gains elsewhere.
Short-Term vs. Long-Term Losses
- Using Short-Term Losses: Short-term losses first offset short-term gains, and then any remaining losses can offset long-term gains,
- Using Long-Term Losses: Likewise, long-term losses first offset long-term gains, and any remaining losses can offset short-term gains.
Understanding Netting Rules –
Netting rules govern how losses and gains are matched and offset against each other. Here’s a step-by-step example:
- Short-Term Losses vs. Short-Term Gains: Suppose you have $5,000 in short-term losses and $3,000 in short-term gains. The short-term losses would offset the short-term gains completely, leaving $2,000 in net short-term losses.
- Long-Term Losses vs. Long-Term Gains: Now, imagine $2,000 in long-term gains. The remaining short-term losses would offset these completely, resulting in a net neutral position.
Offsetting Other Income: With no more capital gains to offset, you could then apply up to $3,000 of the remaining net losses against other income, such as wages or interest.
Understanding how to apply both short-term and long-term losses can help you optimize your tax situation.
Carry Forward Unused Losses
If your capital losses exceed your capital gains each year, you can carry forward those unused losses to offset gains in future years. This ability to carry forward losses adds a layer of strategic planning that extends beyond the current tax year.
Practical Strategies for Implementing Investment Loss Planning
Investment loss planning is not just a one-size-fits-all concept. It requires a tailored approach that resonates with the unique needs of business owners, high earners, and those aiming for financial alignment. In this section, we’ll explore various strategies that can be employed:
Part A: Assessment of Current Portfolio
Evaluate Existing Investments: Identify assets within your portfolio that are underperforming or not aligning with your goals.
Analyze Potential Losses: Assess whether selling these investments would lead to short-term or long-term losses and how they might offset gains.
Part B: Aligning with Financial Goals
Understand Your Objectives: Tailor your investment strategy to align with your broader business and personal financial goals.
Consider Risk Tolerance: Determine your comfort level with risk and how it fits with your investment loss planning.
Part C: Utilizing Tax-Loss Harvesting
Implement the Wash Sale Rule: Avoid buying substantially identical investments within 30 days before or after selling at a loss to comply with IRS regulations.
Work with Financial Professionals: Engage with experts who understand your specific needs and can guide you in employing tax-loss harvesting efficiently.
Part D: Continuous Monitoring and Adjustments
Regular Portfolio Reviews: Schedule periodic assessments of your portfolio to ensure it continues to align with your goals and make adjustments as needed.
Stay informed about Tax Changes: Tax laws can change, so staying updated or working with a tax professional ensures compliance and optimal strategy alignment.
Part E: Considerations for Business Owners & HENRYs
Integration with Business Objectives: Ensure that investment loss planning aligns with both personal wealth and business growth strategies.
Leverage Business Assets: Consider how business assets can be part of the broader investment loss planning strategy.
Customized Approach: Recognize that a generalized approach may not suit your unique situation; consider working with professionals who specialize in your demographic.
Investment loss planning is a multifaceted strategy that requires attention to detail, alignment with broader financial objectives, and ongoing monitoring. For business owners and high earners, it’s not merely about reducing taxes but about integrating this strategy within a comprehensive wealth management framework.
By understanding your unique needs and leveraging strategies like tax-loss harvesting, you can create a dynamic investment loss planning approach that resonates with your specific goals. Whether it’s paying less in taxes or having more time and less stress, these strategies are essential tools in your financial toolkit.
Would you like to align your money with your goals, make smart financial decisions, and proactively manage the risks and taxes that come with business ownership and life?
That is what we help clients do.
Securities offered through The O.N. Equity Sales Company, Member FINRA/SIPC, One Financial Way, Cincinnati, Ohio 45242 (513) 794-6794. Investment Advisory services offered through O.N. Investment Management Company.