I realize this is not the usual time of year for tax loss harvesting questions, but what the heck.. There are a lot of smart and knowledgeable people here so I am trying to take advantage.
I understand that the general idea behind tax loss harvesting is to sell investments that have losses and use those losses to offset income, thereby reducing one's current-year income tax. To me, this never seemed all that important, because I would not want to change my asset allocation - so if I sold something at a loss, I would want to buy it back ASAP. Meaning either waiting for the 30-day wash sale period or buying something similar but not identical (Question 1: Would it avoid wash sale rules to sell a total market index fund for a tax loss and immediately buy a S&P 500 fund? They are different, but very highly correlated.). This means that I would just have a lower basis in the investment and have to pay more tax sometime in the future when I sell.
But perhaps there is an advantage here. If your current marginal tax bracket is 28% or 33%, for example, you might be saving money at that rate by tax loss harvesting. Then, sometime in the future, you might be retired and selling your asset, being taxed at long-term capital gains rates. So even though you lowered your basis and will now have to pay tax, you would pay the tax at a rate of 15% (or maybe even 0%?). Question 2: This idea is predicated on whether it is legal to offset current earned income taxed at marginal rates with long-or-short-term capital losses; is this possible? I seem to recall that this is possible but that there is a low limit for how much can be offest - but then that there is some ability to carryover losses to later years?
Question 3: Is this, then, the goal of tax loss harvesting - to save money that would be taxed at the higher tax rate today with the expectation of paying the tax at a lower rate in the future?
I understand that the general idea behind tax loss harvesting is to sell investments that have losses and use those losses to offset income, thereby reducing one's current-year income tax. To me, this never seemed all that important, because I would not want to change my asset allocation - so if I sold something at a loss, I would want to buy it back ASAP. Meaning either waiting for the 30-day wash sale period or buying something similar but not identical (Question 1: Would it avoid wash sale rules to sell a total market index fund for a tax loss and immediately buy a S&P 500 fund? They are different, but very highly correlated.). This means that I would just have a lower basis in the investment and have to pay more tax sometime in the future when I sell.
But perhaps there is an advantage here. If your current marginal tax bracket is 28% or 33%, for example, you might be saving money at that rate by tax loss harvesting. Then, sometime in the future, you might be retired and selling your asset, being taxed at long-term capital gains rates. So even though you lowered your basis and will now have to pay tax, you would pay the tax at a rate of 15% (or maybe even 0%?). Question 2: This idea is predicated on whether it is legal to offset current earned income taxed at marginal rates with long-or-short-term capital losses; is this possible? I seem to recall that this is possible but that there is a low limit for how much can be offest - but then that there is some ability to carryover losses to later years?
Question 3: Is this, then, the goal of tax loss harvesting - to save money that would be taxed at the higher tax rate today with the expectation of paying the tax at a lower rate in the future?