Thanksgiving is Around the Corner: Time to Harvest

October 15, 2008


Last show we talked about the silver lining of a financial crisis. This week I talk about the special opportunities that these down markets can offer. More specifically, if you did not catch it from the title of this post, I am talking about harvesting tax losses. More than likely, and probably by no fault of you or your adviser, you have experienced some significant losses this year. When the markets behave this way, it hurts everyone, even those investors doing everything right.

There is an old adage that says you never lose money in the markets until you sell. This is true, but should not be the only way you look at your taxable accounts. Now remember, harvesting only works in taxable accounts. Tax advantaged or tax deferred accounts won’t allow you to harvest because of their special tax treatment of current income. What you want to if you have significant losses is sell out of your loss position and, not go to cash, but rather lock in those losses and immediately buy back into a similar type of asset or a different asset that you need in your allocation. There are special rules when implementing these strategies such as the wash sales rules that I describe in depth on the show.

You will want to approach this a little differently than the way you have previously thought about gains and losses. In most situations you would like for your gains and losses to net to zero. However, most of your gains right now are going to be long term. These long term gains are already experiencing favorable tax treatment through the current capital gains tax rates. If you sell these long-term positions, then your losses will be offsetting 15% of taxes. A more beneficial strategy would be to have your losses exceed your gains by $3,000. As a taxpayer you are allowed to take a $3,000 capital loss off your annual income taxes. Instead of offsetting 15% of long-term capital gains taxes, you are offsetting ordinary income where your annual marginal tax rates can be as high as 35%.  What if you have net losses in excess of $3,000? Not a problem! The IRS will allow you to carry forward losses indefinitely and each year you can use those losses to offset gains, or offset $3,000 of ordinary income.

On this weeks show I also share how to know what capital gains will be distributed to you from your mutual funds as well as go more in depth to the ins and outs of tax harvesting.

Another topic I touch on is how to save a little bit of money in these hard economic times. It ties right in with a podcast I did about eight months ago entitled $200 a Month With a Few Phone Calls. I am living proof that this actually works because I have been circling the wagons of my own personal finances over the last two or three weeks, and I have been able to shave a significant amount off of my monthly bills.

I close out the show by discussing my fascination with watching Netflix movies and TV shows on my home TV through the $99 Roku player that I purchased a few months ago. The last two weeks have been huge for Netflix because they have significantly increased their instant view catalog by working out deals with the Starz Movie Network, CBS, and Disney.  If you are looking for a way to trim down your monthly cable bill the Netflix Instant Viewing library is your key.  Listen to today’s show to hear my review of Netflix and the Roku Player. This innovation is just as big as when I purchased by first DVR (TIVO) or the iPhone. Click on the link below if you want to check out Netflix.


This week I also share listener emails and thank all of you for the positive feedback you are giving the Money-Guy show on the website and on iTunes. Without the support and suggestions from all of you, the Money-Guy show wouldn’t be what it is today.

TAGGED WITH: Investing, taxes



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