Financial Advisor to clergy and religious educators 

Loss Harvesting
Loss harvesting is a technique that takes advantage of unrealized losses and turns a negative into a positive. You acquire losses by selling investments (when appropriate) and accumulate them. When you sell another investment with a large capital gain, you can offset the gain against the harvested losses to pay little or no taxes. Outside a tax deferred account, buying a mutual fund is easy. But selling it and minimizing your tax bill can be a headache. Particularly when a partial sale occurs, planning can dramatically cut your tax bill.

Mutual fund investors get four options for determining their shares’ cost for tax purposes. They are: first in, first out (FIFO), average cost, average cost – double category, and specific identification. Specific identification allows you to choose which shares to sell and generally results in the lowest tax bite. You can recognize (and harvest) a loss that can be used to offset other gains. 

This method requires excellent record keeping. An example: you buy 1,000 mutual fund shares at $10 in 1995, reinvest 250 additional shares (from dividends) over three years at $12, $15 and $18. The shares are now worth $20 and you need $2,000 by selling 100 shares. FIFO generates a $200 tax bill versus $79 using specific identification.

Your financial planner can help ensure that the tax monster is kept at bay. A comprehensive financial plan can help minimize taxes further by determining which investments are best suited for tax deferred and taxable accounts. While you should never sell a loss or a gain strictly for tax purposes, when circumstances do require it, financial and tax planning can make a substantial difference at tax time.

Dresner Financial Planning Dresner@clergyplanning.com
2359 Salisbury Road Westbury, NY 11590
(888) 200-9670
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