By Jessie Szymanski
Vice President, BlackRock
You still have time to reduce your 2013 tax bill. Jessie Szymanski explains why tax loss harvesting should be on your holiday to-do list.
In my last post, I confided in you my feelings on paying taxes, shared a tip for how to potentially pay less this year, and promised another word to the wise. So here’s tip #2: take advantage of tax loss harvesting.
What is tax loss harvesting?
Tax loss harvesting is purposefully selling an investment at a loss.
How on earth could that help? Because the government taxes you on your total gains for the year, you can use losses in one part of your portfolio to offset gains in another, and reduce your total tax bill.
This technique can make a difference in your tax bill and on your long-term returns. The federal government currently taxes long term capital gains (from the sale of investments held more than 1 year) at a rate up to 23.8%, and short term capital gains at an individual’s ordinary income tax rate. This year, the highest income tax bracket is a whopping 43.4%*.
According to the IRS, you can also carry your losses forward indefinitely. So make sure you’ve used up all of your losses from prior years (2008 is a good place to start!) to make sure you’re not leaving some losses on the table.
Where should I look in my portfolio this year?
Check your monthly statements to see where you’re at a loss or gain. US stocks have had a good run this year, but this list of the Six Worst S&P 500 Stocks of 2013 proves that not all stocks are winners.
How can I stay invested during the meantime?
If you’re looking to sell individual stocks to offset gains, diversified ETFs and mutual funds can help you stay invested during what’s known as the “wash sale” period.
The “wash sale” rule says that an investor can’t claim a loss on the sale of an investment and then buy a “substantially identical” security for the period beginning 30 days before and ending 30 days after the sale. (Think of it as the government’s insurance policy—they want to make sure that investors don’t get a tax break and then instantly buy back their original investment.)
Because ETFs and mutual funds hold many stocks or bonds, (and so look very different from an individual stock), they can be great candidates for reinvesting your money during the 60-day period.
Bottom line: there’s still hope to reduce your tax bill this year. In between trips to the mall and grocery store, take a quick look at your investments to see where you can save this year—I promise you won’t regret it.
Jessie Szymanski writes about personal finance for iShares. You can find more of her posts here.
This article was produced by iShares and not by the Quartz editorial staff.
* The Patient Protection and Affordable Care Act was enacted in 2010 and imposed a 3.8 percent net investment income tax (“NIIT”) on higher income taxpayers for tax years beginning in 2013. For individuals, the tax is assessed on the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (AGI) over a threshold amount, generally $250,000 for married taxpayers filing joint returns and $200,000 for single taxpayers. Net investment income includes, but is not limited to interest, dividends, royalties, rental income, and net gain from the disposition of property. Such investment income is reduced by properly allocable deductions to arrive at net investment income. Tax exempt interest (e.g., Interest from municipal bonds) is not subject to the NIIT. The NIIT does not apply to nonresidents of the U.S. and will not affect income tax returns for the 2012 taxable year that will be filed in 2013. The information provided is neither tax nor legal advice. Tax laws and regulations governing the NIIT are complex. Investors should speak to their tax professional for specific information regarding their tax situation.
The Internal Revenue Service has not released a definitive opinion regarding the definition of “substantially identical” securities and its application to the wash sale rule and ETFs. The information and examples provided are not intended to be a complete analysis of every material fact respecting tax strategy and are presented for educational and illustrative purposes only. Tax consequences will vary by individual taxpayer and individuals must carefully evaluate their tax position before engaging in any tax strategy.
Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses, which may be obtained by visiting www.iShares.com or blackrock.com or by clicking the Prospectuses link above. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal.
The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).
The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications or other transactions costs, which may significantly affect the economic consequences of a given strategy.
The information provided is not intended to be tax advice. Investors should be urged to consult their tax professionals or financial advisors for more information regarding their specific tax situations.
BlackRock does not provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.
The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Cohen & Steers Capital Management, Inc., European Public Real Estate Association (“EPRA® ”), FTSE International Limited (“FTSE”), JPMorgan Chase & Co., MSCI Inc., Markit Indices Limited, Morningstar, Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate Investment Trusts (“NAREIT”), New York Stock Exchange, Inc., Russell Investment Group or S&P Dow Jones Indices LLC, nor are they sponsored, endorsed or issued by Barclays Capital Inc. None of these companies make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies listed above.
©2010-2013 BlackRock. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners.