It’s 2017 and the stock market is having a banner year. Most agree that’s a good thing. But too much of a good thing is causing some investors to be happy they still have a few losers in their portfolio. That’s because losses can be used to help offset gains, and reduce taxes.
I was first made aware of this tax-reducing tactic early in my career. A client contacted me in the call center for a mutual fund manager I worked for. He asked me to help him pick a fund that was sure to lose money in a short amount of time. Now, that was a twist. Usually people want to get rich quick, not lose money quickly. After doing some digging, I found out he was trying to rack up an investment loss that he could deduct from his big gains for the year. I was of no help.
Good news: Strong stock market performance means a lot of people make money on their investments.
In 2017, a person didn’t have to be super smart to make money in the stock market. All the major stock indexes show that the broad stock market has been pretty profitable.
2017 year-to-date stock market index results*:
- Dow Jones Industrial Average ↑ 18.70%
- S&P 500 Index ↑ 15.49%
- NASDAQ ↑ 26.20%
*through Nov. 16
That’s the good news. The bad news is that we eventually have to pay taxes on money gained by our investments.
Bad news: We have to pay taxes on money gained by our investments.
Important side note: Money in a employer-run retirement account or IRA is exempt from taxes year to year – until withdrawals are made. But, the money you make on investments outside of a retirement account is likely subject to taxes.
In the normal course of business, investors will owe taxes on any dividends paid by the issuer of the investment and on any gains realized by selling for a higher amount than was invested.
Taxable events from investments:
- Dividend distributions
- Realized gains
More good news: We can reduce taxes by offsetting gains with losses.
Thankfully, the IRS allows tax filers to offset investment gains with losses. That’s why some investors are happy to have one or more losers in their investment portfolio in 2017.
Example:
- Sell Stock A for a gain of $10,000
- Sell Stock B for a loss of $5,000
- Taxable gain = $5,000
In the example above, the investor can reduce her overall gain (and taxes) on Stock A by selling Stock B while the value is lower than what she paid for it.
The amount of tax due will vary depending on the individual’s Adjusted Gross Income (AGI) and whether the gains were short term (one year or less) or long term (more than one year).
The takeaway: If you sold any investments outside of your retirement account this year, you can potentially reduce the amount of taxes you’ll pay on the gain by selling losing investments that you no longer care to keep.
Important: The information provided here is for educational purposes and should not be considered advice. Before you make any final decisions, consult a trustworthy financial professional and/or tax planner.
Retire Gen X 