As we prepare for our 2018 Taxes, I thought I would blog on the tax loss harvesting that we did in 2018 to lessen our tax burden.
I should mention prior to getting into this topic that it is too late for this concept for 2018. You must conduct the sale of your holdings in the calendar year that you wish to reduced your taxes. We use Quicken and have a reminder set up each month to remind us to look at our potential losses for these opportunities. If you don’t use Quicken or similar software, I highly recommend it.
What is tax loss harvesting?
Tax loss harvesting is when you conduct the sale of an equity holding that is in an after-tax account at a loss. The IRS lets you deduct those losses from your taxable income. They allow you to claim up to $3,000 in a given year. If you have a greater loss, let’s say $5,000, you can claim the additional $2,000 in subsequent years.
What does this save you? Assume you are in the 22% marginal tax bracket. If you deducted the $3,000 from your taxable income, your savings would be $660. We strive to save a few bucks on everything, so that is no chump change for us.
When you sell your holding, I strongly recommend that you buy another fund to ensure your money stays invested. The fund needs to be different enough that you don’t accidentally conduct a wash sale.
What is a wash sale?
A wash sale is when you sell a fund to claim the tax loss and then repurchase the same fund or a fund that tracks the same asset class or index. Per the IRS, you must wait at least 30 days until you repurchase that asset in order to avoid the wash sale.
Our 2018 example:
We hold the majority of all of our assets in our after-tax account in Vanguard’s VTSAX fund. After the markets decline in Q4, I decided to sell all losing shares of VTSAX.
I logged on to Vanguard and ran a report of all purchases of VTSAX. I sorted each lot chose the specific lots under the current market price of $66.10. I was unable to sell specific lots online so I had to call Vanguard. The process was very simple and took about 10 minutes. I read the dates of all of the specific transactions to the operator and they continued with the sale.
I had a total of 15 lots of VTSAX bought between 11/29/17 through 9/27/2018. The purchase prices of the fund varied between $72.18 and $66.65. In mid-December with VTSAX at $66.10 per share, I decided to sell.
The total losses for all lots sold was $1,788.21. I will claim that entire amount as a loss on my 2018 taxes, saving me $429 on my taxes. Cha Ching!
What did I do with the money?
After the sale, I had the operator move the funds to my settlement account. I then went home and did some quick research moved all the proceeds to VLCAX, a large cap index fund.
I have about another 2 weeks until I can move that money back to VTSAX. As I type this another cool thing could happen, I could lose more money!
The purchase of VLCAX was made at $60.41 per share and the current price is $57.96. When I make the move back to VTSAX, that trade may be done at a loss enabling me to reduce our 2019 taxes.
Since I believe that the market will eventually return to surpass previous highs, I don’t mind these temporary losses because it enables me to take a tax deduction that will allow me to boost my savings by a few hundred dollars and that money can compound indefinitely.
A few other notes
Tax loss harvesting seems to creep up into personal finance outlets towards the end of the year. You can take advantage of this anytime in the year that the market drops especially if you can make the trades at no cost.
Our single biggest expense is our taxes, we are all about minimizing every expense and taxes are no different. When we save additional money anywhere, that money is automatically invested towards our goals. If you spend the money you just saved on a non-budgeted expense, you probably just gained more crap and lost not only the principle but the perpetual compounding growth it would have earned.
Keep an eye on your losses and remember to keep good records for tax time.