When to not tax loss harvest?

[nassa]

I am in my late 50s and will be in the 12% marginal tax bracket in 2022 via some earned income.



In 2023 and going forward until Social Security and RMDs, I plan to be in at least the 12% bracket due to expected Roth conversions, but there will be no earned income due to full retirement. During this time, I expect to fund living expenses from selling equities in my taxable account.


Question: I have the opportunity to take substantial losses now in 2022 via tax loss harvesting. Will this be beneficial or will these losses be wasted given my expected tax situation going forward?


Thanks!

 

[RunningBum]

I can think of 2 reasons to definitely NOT tax harvest:

1) If you're going to have a wash sale in an IRA. This would negate the capital loss in your taxable account, and you would never have a chance to recover it.

2) If you're going to use them against gains that would be taxed at 0%, and in future years you expect to be paying 15% on LTCGs. You'd be better off deferring the loss until you can use it against something, or letting the holding recover back to a gain.

If you'll always pay 0% on gains, then it's not really a negative against TLH, just a discard of the benefit.

Now, if it's a holding you really want to get rid of, you might do so anyway. There's a saying that you shouldn't let the tax tail wag the dog. I don't think you should ignore the tax aspect, but you should factor it into your decision.

Ideally you will be able to use the loss $3000/year to reduce regular income, or an extra $3K of Roth conversions. You can do this with any cap loss not covered by cap gains, and the rest is carried over.

I last tax harvested in 2020. The sale netted me a lot of proceeds and a loss that would last for quite a few years if I didn't have to use it against gains. I wanted it to take me to at least 65, so I could use to help lower my income for ACA subsidies, especially if the cliff came back. So I set aside part of the sale to keep liquid, mostly in a CD ladder to get me to 65. When each CD matures I use it for expenses for the year rather than renewing it. The rest I invested in a different fund than the loser.

Maybe you have some similar setup where you can sell the losers to get that living money you're going to need anyway, and be able to use the loss $3K/yr against regular income for a few years.

 

[nassa]

I can think of 2 reasons to definitely NOT tax harvest:

1) If you're going to have a wash sale in an IRA. This would negate the capital loss in your taxable account, and you would never have a chance to recover it.

2) If you're going to use them against gains that would be taxed at 0%, and in future years you expect to be paying 15% on LTCGs. You'd be better off deferring the loss until you can use it against something, or letting the holding recover back to a gain.

If you'll always pay 0% on gains, then it's not really a negative against TLH, just a discard of the benefit.

Now, if it's a holding you really want to get rid of, you might do so anyway. There's a saying that you shouldn't let the tax tail wag the dog. I don't think you should ignore the tax aspect, but you should factor it into your decision.

Ideally you will be able to use the loss $3000/year to reduce regular income, or an extra $3K of Roth conversions. You can do this with any cap loss not covered by cap gains, and the rest is carried over.

I last tax harvested in 2020. The sale netted me a lot of proceeds and a loss that would last for quite a few years if I didn't have to use it against gains. I wanted it to take me to at least 65, so I could use to help lower my income for ACA subsidies, especially if the cliff came back. So I set aside part of the sale to keep liquid, mostly in a CD ladder to get me to 65. When each CD matures I use it for expenses for the year rather than renewing it. The rest I invested in a different fund than the loser.

Maybe you have some similar setup where you can sell the losers to get that living money you're going to need anyway, and be able to use the loss $3K/yr against regular income for a few years.

Thank you, RunningBum. This is a fantastic and creative idea! I am in a similar situation that I could incur the loss and set the proceeds aside in a CD or similar instrument and use it to fund my living expenses. I already allocate across all my accounts so it’s easy enough to rebalance when taking the withdrawal.

I will also be using the ACA for insurance so will want to keep my income lower yet still do some Roth conversions. I will give this more thought but I like that it makes use of the loss in a way that doesn’t “discard the benefit” as you wrote above. I really appreciate your thoughtful response.