Offsetting large carryover losses while in high tax bracket

[MooreBonds]

Didn't know if this dawned on anyone, or if anyone employed this action, but I just realized one move that would make sense for those looking at downgrading their tax brackets AND also having accumulated capital losses carried over:

If you are nearing retirement and anticipating a drop in income tax rates and also have accumulated losses (which I realize won't describe many investors in this forum....except for [-]me[/-] those who are foolish enough to make costly investment errors), it would be a smart tax move to sell the positions with gains to offset your losses, and then re-buy them, such that you aren't taking your capital losses off against income that is taxed at a lower rate.

Although, there are other angles to consider, such as if you have carryover losses, and intend to use those losses to offset large capital gains in retirement and keep yourself in the 0% tax bracket vs bumping up into, say, a 15% bracket (just as much as a differential as 28% tax bracket while working vs 15% while retired).

 

[ChiliPepr]

Just be careful you do not violate the Wash Sale rules...

What is the 'Wash-Sale Rule'
An Internal Revenue Service (IRS) rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security in a wash sale. The rule defines a wash sale as one that occurs when an individual sells or trades a security at a loss, and within 30 days before or after this sale, buys a “substantially identical” stock or security, or acquires a contract or option to do so. A wash sale also results if an individual sells a security, and the spouse or a company controlled by the individual buys a substantially equivalent security.

 

[Texas Proud]

Yes, many people do that move.... and it is not just when you are close to retirement.... you can do it at any stage of life...

It is not smart to let the losses go to long term... at least when you actually have a tax liability....

 

[brett]

We review our investments in November to determine if we should undertake tax loss savings from any dog that happens to be in the portfolio. Use it to reduce the gains, if no gains then apply it to a previous year or to future years.

 

[Curmudgeon]

Just be careful you do not violate the wash sale rules...

I don't think wash sale would be applicable for the specific situation the OP is talking about... In his case, he is saying that since he has a loss in 'A' which he wants to claim, he is also going to sell 'B' for a gain, and then buy 'B' back immediately. There's no wash for 'A' since he is only selling it, and no wash for 'B' since there is a gain (washes only apply to losses).

Just clarifying.

 

[Fedup]

Maybe he's already incurred a large loss. He is thinking of reducing his gain basis going forward.

 

[Retireatee1]

Wash sale rule doesn't apply to gains.

One thing I hate is when a tax loss carryover offsets long term capital gains instead of ordinary income. You can't pick and choose what type of income is offset, it goes in the IRS's favor.

 

[kaneohe]

..................................

It is not smart to let the losses go to long term... at least when you actually have a tax liability....

I've seen this said but I don't understand why..........what's the problem if they go long term? Generally you net ST gains/losses, and net LT gains/losses and then net the nets against each other . Could you give an example where it helps to have ST losses instead of LT.

 

[HillCountry]

I took huge business loss when both of us working in Bay Area. Then we moved to Texas and gained back the losss. We skipped CA tax.

 

[Texas Proud]

I've seen this said but I don't understand why..........what's the problem if they go long term? Generally you net ST gains/losses, and net LT gains/losses and then net the nets against each other . Could you give an example where it helps to have ST losses instead of LT.

ST cap gains are taxed at a higher rate than LT gains... so the same theory is for ST losses vs LT losses...

If you have ST losses, you can offset ST gains or distributions from mutual funds... once they go long term, then you are now reducing an item that already has a tax advantage to it...


Now, if you have a big loss... you do have to use the loss for all of your LT gain and then can offset up to $3,000 of ordinary income....

 

[kaneohe]

ST cap gains are taxed at a higher rate than LT gains... so the same theory is for ST losses vs LT losses...

If you have ST losses, you can offset ST gains or distributions from mutual funds... once they go long term, then you are now reducing an item that already has a tax advantage to it...


Now, if you have a big loss... you do have to use the loss for all of your LT gain and then can offset up to $3,000 of ordinary income....

EX: have ST gain of 20K plus ST loss of 23K. Net result is 0 STCG and
3K loss applied against ordinary income.

EX2: have same ST gain of 20K plus LT loss of 23K. Net result is 0 STCG
and 3K loss applied against ordinary income.

In this case I don't see a benefit of the ST loss over the LT loss. That's why
I'm puzzled.

 

[Texas Proud]

EX: have ST gain of 20K plus ST loss of 23K. Net result is 0 STCG and
3K loss applied against ordinary income.

EX2: have same ST gain of 20K plus LT loss of 23K. Net result is 0 STCG
and 3K loss applied against ordinary income.

In this case I don't see a benefit of the ST loss over the LT loss. That's why
I'm puzzled.

That is one way to look at it.... and if you do have a huge loss it is not as beneficial... but....

EX1 Have $20K of ST gains and $15K of ST losses.... plus $15K of LT gains... you pay tax on $5K ordinary income rates and $15K of LT gain rates

EX2 Have $20K of ST gains and $15K of LT losses.... plus $15K of LT gains.... you pay taxe on $20K at ordinary income rates and $0 on LT gain rates...

A big difference in EX1 vs EX2 if you are in a high to very high tax bracket...

 

[kaneohe]

Great example.....thanks! You're more creative than me.

 

[dixonge]

If you are nearing retirement and anticipating a drop in income tax rates and also have accumulated losses (which I realize won't describe many investors in this forum....except for [-]me[/-] those who are foolish enough to make costly investment errors), it would be a smart tax move to sell the positions with gains to offset your losses, and then re-buy them, such that you aren't taking your capital losses off against income that is taxed at a lower rate.

Don't think you've cornered the market on carryover losses

I'm glad you brought this up. I've been nursing losses along, and it would be nice to try and use them up at a faster clip. Mostly LT losses. Of course, you have to *have* the current gains in order to take them... :/

I guess I was thinking that the wash sale rule would apply here, but evidently that only applies if you sell at a loss. Selling to lock in a gain isn't penalized, probably because it isn't otherwise advantageous since it would normally trigger a tax event.

Although, there are other angles to consider, such as if you have carryover losses, and intend to use those losses to offset large capital gains in retirement and keep yourself in the 0% tax bracket vs bumping up into, say, a 15% bracket (just as much as a differential as 28% tax bracket while working vs 15% while retired).

A quote from a thread over on the Bogleheads forum:

that $280k carryforward loss is like a $93k interest-free loan (in the 33% capital gains bracket) you are giving to the government. I don't think you want to deduct $3k/yr for the next 93 years.

They were suggesting that it was better to use it up now rather than sit on it indefinitely...