It’s not always a bad thing to lose money. Smart investors try to be strategic about how they do it, though. If you’re facing capital gains or a high-income tax bill, you can offset up to $3000 annually with capital gains losses. If it’s more than $3000 or you don’t have enough income tax owed to offset this amount, you can carry it forward on your tax return in future years.
The amount you are carrying forward is listed on your tax return and can be used as a tax management tool. While you may not like the idea of realizing a loss on your investment, that capital loss may prove to be a valuable asset come tax time.
Capital gain tax bracket bumps don’t phase up
Think about this – in 2018 if you’re filing a joint return with $77,401 in capital gains, you jump from owing 12% to a whopping 22% on short term gains for that $1 over $77,400. That’s for all your gains, not just the money over the threshold amount as is the case with the new income tax laws. Selling off some of your holdings for a loss could mean a lot of extra money in your pocket in this case.
It’s important to know how different tax forms calculate income and losses and what is permitted for carryover with each. For example, if you have a farm business and file a Schedule F, you can carry over substantially more in losses annually than is allowed on a Schedule C.
Need financing? Maybe taking that loss isn’t such a good idea
Another issue to consider in deciding whether to take a loss is if you plan on looking for a loan in the near future. Sometimes losses come when we don’t plan for them, but with a good financial advisor, you can manage these challenges with strategies aligned to your goals. Consider whether you’ll be looking to borrow money in the near future.
Income for typical borrowing is now calculated on the bottom line of your tax return. That means if you log a big business loss on a pass-through entity and this gets carried over for years to zero out your tax liability, you won’t be able to get traditional financing. Even though this has nothing to do with your current income situation, banks are now mandated to calculate the ability to repay not only on what you make or lose in a given year, but to also to factor in carry-over net operating losses on any federally insured loan. This can be a big deal if you’re looking to get a mortgage.
Sometimes booking a gain makes sense. Selling off an asset that has depreciated may make it a taxable event for you but it’s likely to be much less than what those named in your will would be required to pay. Loss benefits do not pass to heirs when you die. The IRS will get less money from your estate if you can take losses when possible during your lifetime. This can get complicated, so if you’re unclear on how all these items are calculated, it makes sense to get some professional input.
Health insurance subsidies
This is something to consider too – not all states provide Medicaid health insurance support for low-income earners. If you’ve earned less than the income level stipulated by the federal program to qualify, you won’t get any help paying for health insurance in the Commonwealth of Virginia. Knowing what that number is (currently $25,100 for a family of four and $12,140 for an individual) can make a big difference. Bumping up your income just a bit to pass that threshold can allow you to qualify for a substantial subsidy you wouldn’t otherwise get for health insurance.
Plan your numbers for tax time
The gotcha is, being smart about how you take advantage of losses and gains for tax purposes requires planning ahead. If you’re in the tax filing year already, it’s too late to move money around to reduce taxes owed – unless, of course, you’re putting it into an IRA. Good financial professionals help you ensure you won’t be paying more taxes than necessary by scheduling time with you and offering strategies to increase income and decrease tax liabilities prior to year-end.
Do you have someone advocating for you in a way that helps you keep more of your hard-earned investment and income money? If not, give 360 Tax Solutions a call for a free consultation at (540) 562-0123 to explore how you can save more.