Time to Harvest Your Clients’ Losses?

Wealth Solutions

Time to Harvest Your Clients’ Losses?

The fourth quarter is a good time to determine if harvesting your clients’ losses would be an effective tax strategy.

The fourth quarter is a good time to review your clients’ overall asset allocation to ensure it is both tax efficient and aligns with their financial goals. Since some investments generate more taxable distributions than others, it’s important to evaluate their investments, after-tax returns, portfolio turnover ratio and historical distributions to get a sense of their annual tax liability. Especially at year end, you have the opportunity now to take steps to help minimize this year’s tax liability for your clients.

One way to diminish your clients’ 2015 tax burden is to harvest capital losses in order to offset realized gains. The deadline to sell securities to realize a gain or loss is December 31, 2015. However, be aware of the “wash-sale” rule. This rule will not allow you to deduct capital losses on the sale of a particular security if you initiate a similar posi­tion within a 61-day period (30 days before the sale date and 30 days after the sale date). Note that these rules apply to both taxable and nontaxable accounts. So, for example, you can’t liquidate a position in one account and establish a similar position in your clients’ IRA within that timeframe.

Source: Fidelity

If your clients’ capital losses are more than their capital gains, you can claim a capital loss deduction. You may use their total net loss to reduce their income dollar for dollar, up to the $3,000 limit per year.

If your clients have a total net loss that is more than the annual limit, you can carry over that unused portion to next year and treat it as if they incurred it in 2016. If part of the loss is still unused, you can carry it over to later years until it is completely used up.

Here’s an example of how to claim the capital loss deduction. Let’s say Earl and Samantha sell securities at the end of this year. The sale yields a capital loss of $7,000, and they have no other capital transactions. On their joint tax return for 2015, they can deduct $3,000 of the $7,000 loss. Next year, they can carry over the unused part of the loss, $4,000 ($7,000 − $3,000), up to the limit for that year.

Harvesting your clients’ losses could be an effective strategy to help reduce their 2015 taxes. 



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