How to use tax loss harvesting

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Q. What does it mean to offset gains with losses for my taxes?
— Tax newbie

A. Once again we find ourselves at year-end with yet another opportunity to make some last-minute tax planning moves in an effort to lower the bite next April.

One such tactic is to take a look at opportunities to offset possible capital losses against capital gains already realized in your investment portfolio, said Cynthia Fusillo, a certified public accountant with Lassus Wherley in New Providence.

This is sometimes referred to as “tax loss harvesting.”

Fusillo said IRS regulations allow taxpayers to offset capital losses dollar-for-dollar against capital gains, Fusillo said.

“Many say that the tax tail should not wag the investment dog, however, if you are already thinking about selling securities with loss positions, doing so when you have already realized capital gains for the year is going to save you some tax dollars at the same time,” Fusillo said. “In addition, capital losses can be used to offset up to $3,000 of ordinary income ($1,500 for marrieds filing separately) once fully exhausted against realized capital gains.”

Be careful not to fall under the wash sale rules, though, Fusillo warns.

Wash sales are triggered when a security is sold at a loss, and within 30 days before or after the sale, a substantially identical security is purchased, she said.

In such cases the loss will be disallowed.

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NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.