Monthly Newsletter Nov. 2023
Natalia Ivanova, IAR?
Founder and CEO, Financial Planning Specialist at NewGen Wealth Creation | Former Financial Advisor at Morgan Stanley
Each month, I'll provide you with the latest news, tax tips, and resources to help you stay on top of your finances. In this month's newsletter, we will go over tax-loss harvesting, a wealth management strategy that can help you reduce your tax liability and improve your after-tax returns.
KEY POINTS
Tax-Loss Harvesting and why it matters.
Not every investment turns out to be a winner, but there's a silver lining to losing investments: tax-loss harvesting. This strategy allows you to use losses to lower your tax liability and improve your overall portfolio position. Tax-loss harvesting involves selling investments that have lost value to offset capital gains tax. This becomes particularly effective during market downturns, as it helps reduce taxes without selling winning investments.
?If some of your investments performed poorly this year, they could be beneficial when it comes time to settle with the IRS. This strategy, part of effective wealth management, not only saves on taxes but also leaves more money in your pocket for further investment, ultimately contributing to wealth creation over time.
Here's how tax-loss harvesting works: you sell investments that have declined in value and use the proceeds to buy similar investments. For instance, if you have a $10,000 stock investment now worth $5,000, selling it incurs a $5,000 capital loss. You can use this loss to offset capital gains, potentially saving a significant amount on your taxes.
When capital losses exceed gains, you can deduct up to $3,000 ($1,500 for those married filing separately) from your taxable income. Any remaining losses can be carried over for deduction in future years. However, it's crucial to work with a professional to ensure accurate calculations and avoid unintended consequences.
Tax-loss harvesting applies only to taxable accounts, aiming to offset taxable investment gains. Because the IRS does not tax growth on investments in tax-sheltered accounts—such as 401(k)s, 403(b)s, IRAs, and 529s—there’s no reason to try to minimize your gains.
The primary aim of tax-loss harvesting is to reduce your current tax liability, making it most advantageous for individuals in higher income tax brackets. Simply put, the higher your tax bracket, the greater the potential savings. However, there are cases where individuals in lower tax brackets may find this strategy beneficial, especially if they experience significant life events that lead to capital gains.
The excellent news here is that nobody understands your situation better than you and your financial advisor, allowing for personalized planning. If you anticipate a significant upcoming event that could result in high gains, especially in a year marked by market volatility where some of your stocks haven't fully recovered from the pandemic, it's worth strategizing. However, it's crucial to collaborate with a professional because miscalculations could potentially harm rather than benefit you.
Why it matters:
?There are several benefits to tax-loss harvesting, including:
Let's take a look at below example of utilizing an investment loss to reduce your capital gains tax:
Pro Tip 1:
You need to complete all of your harvesting before the end of the calendar year, Dec. 31. So set that egg timer and get to work. To apply tax-loss harvesting to 2023, you must implement the strategy by December 31st.
Although you file your taxes in 2024, the IRS only considers 2023 activity.
Many investors and advisors start tax-loss harvesting in the Fall, which contributes to short-term sell-offs and market volatility in the Fall.
Pro Tip 2: When undertaking portfolio rebalancing, it is crucial to incorporate a tax-loss harvesting strategy to minimize tax implications. Rebalancing within taxable accounts can trigger taxable events, often resulting in significant realized gains that necessitate tax payments.
?Thoughtful rebalancing is essential in any scenario, and the implementation of a tax-loss harvesting strategy serves as an effective means to seamlessly manage the rebalancing process while mitigating tax burdens.
How to do It Right
Here are some practical tips for tax-loss harvesting that can be easily understood:
Remember, tax-loss harvesting can be complex, and it's crucial to understand the rules and limitations. If you've done your research and are working with a financial advisor, it can be a powerful strategy to reduce your tax bill and improve your after-tax returns.
领英推荐
Pro Tip 3: Tax-loss harvesting strategy applies to crypto! There is no limit to the amount of cryptocurrency losses you can harvest, but you can only deduct up to $3,000 of those losses to offset ordinary income on your federal taxes.
On The Markets
Last week, the stock market had a bit of a mixed performance. Technology and communications stocks did well, pushing the S&P 500 up by 1.35%. However, the Russell 2000 dropped by 3.11%, and the Nasdaq Composite gained 2.40%. Internationally, things were a bit mixed too, with the MSCI EAFE index going down by 0.90%, and the MSCI EEM index barely moving, inching up by 0.03%. About 90% of S&P 500 companies reported their Q3 earnings, and the numbers show a 4.5% gain compared to last year. While this might not be as bad as it sounds, many are still hoping for a year-end rally!
The chances of a year-end stock market rally are going down each day. The rally we had was mostly happening because of a few big companies. The signs, like the breakdown in different measures and less confident consumers, make it less likely that we'll see a big upswing in the last part of the year.
?Some analysts warn about tax-loss selling affecting portfolios before the end of the year. In a previous newsletter, I talked about how, historically, September through October sees some ups and downs due to tax-loss selling. But usually, December brings strength to both the stock and credit markets. Despite these warnings, a closer look suggests the risks might not be as bad as people say.
We did see a bit of a downturn in September and October, and the folks trading stocks were quite active. But usually, for year-end tax selling to kick in, we need more significant market drops. The people investing in corporate bonds are different from those in stocks. Bond investors want stable, long-term income and don't trade as much. This is unlike stocks, where individual investors play a more active role, creating opportunities for tax-loss selling.
Even though corporate bonds faced some challenges this year, the losses were not that big, and things seem to be getting better. The ups and downs in the U.S. aggregate bond index aren't big enough to make investors sell for tax reasons. So, it's unlikely that tax-related selling in the bond and equity markets will cause major problems.
As always, ensure your portfolio is positioned strategically. Prepare to seize opportunities if the market declines, and be poised for a joyful holiday season if we experience another rally when the market is up.
This information should not be relied upon as research, investment or tax advice, or a recommendation regarding any products, strategies, or any security or digital asset in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change.
What’s Next?
The December monthly newsletter will provide a deep dive into charitable contributions and tax strategies. My goal is to equip you with essential knowledge to make informed decisions. I sincerely hope that this newsletter continues to serve as a valuable resource, keeping you up to date and well-informed.
Quite a few of you asked me before for my book recommendations. I am now a contributor to several newsletters and lifestyle blogs. Below is an article I wrote on my top five books for wealth growth.
Unlocking financial independence and early millionaire status through the power of books.
Natalia Ivanova
Founder and CEO
Financial Planning Specialist
Natalia Ivanova, Founder and CEO, Financial Planning Specialist at NewGen Wealth Creation, and former financial advisor at Morgan Stanley, has 8+ years of experience working with travel-loving professionals and entrepreneurs, from small business owners to CEOs of Fortune 500 companies. A dog mom, immigrant, and Puerto Rico-based world traveler, Natalia is proud to use her platform and experience to empower others to achieve their financial goals and build a fulfilling life.
Our commitment to our clients:
Every day is dedicated to honoring the trust and faith my clients have placed in me.?I?listen to their concerns, understand their needs and continuously work to find solutions and structures that help meet their goals.
NewGen Wealth Creation LLC is an Investment Adviser registered with the Securities & Exchange Commission (SEC), principally located in the state of Puerto Rico. All views, expressions, and opinions included in this communication are subject to change. Please contact us if there is any change in your financial situation, needs, goals or objectives. The information contained in this electronic communication is intended only for the use of the recipient. For your privacy and security, do not include sensitive information using emails that are not secured.
NewGen Wealth Creation LLC is an Investment Adviser offering services in Puerto Rico and in other jurisdictions where it is exempt from registration. All views, expressions, and opinions included in this communication are subject to change. Please contact us if there is any change in your financial situation, needs, goals or objectives. The information contained in this electronic communication is intended only for the use of the recipient. For your privacy and security, do not include sensitive information using emails that are not secured.
Risk Considerations: There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, investors can lose money.