A guide for financial advisors on effectively communicating the benefits of tax-loss harvesting to clients. Covers key points like lowering tax bills and improving returns.
As a financial advisor, tax-loss harvesting is an important strategy you should be discussing with clients at this time of year. With tax season approaching, now is the ideal opportunity to explore how tax-loss harvesting could potentially lower your clients’ tax bills and improve their returns.
Here is an overview of tax-loss harvesting and key points to cover with clients:
What is Tax-Loss Harvesting?
Tax-loss harvesting involves selling securities at a loss to generate capital losses that can be used to offset capital gains from other investments. For example, if an investor realized $10,000 in capital gains from selling stock but also incurred $5,000 in capital losses from selling other stocks at a loss, the losses would offset some of the gains. So, only $5,000 of the gains would be subject to capital gains tax.
Tax-loss harvesting takes advantage of the tax code which allows capital losses to offset capital gains dollar-for-dollar. Short-term losses must first offset short-term gains, and long-term losses offset long-term gains. If losses exceed gains in either category, then such losses can be netted together to create a net taxable gain or loss. If total losses exceed total gains, up to $3,000 of excess losses can be deducted against ordinary income. Any remaining losses carry forward to offset gains in future years.
Why Bring Up Tax-Loss Harvesting Now?
Reviewing realized gains and losses with clients at year-end allows time to implement tax-loss harvesting strategies before the tax filing deadline. Selling losers over the next few months can provide tax savings on this year’s return. Acting now also gives more time to avoid wash sales by waiting 30 days before repurchasing the same security.
What Are the Benefits for Your Clients?
There are two major benefits of tax-loss harvesting to focus on:
- Lower current year tax bill – Harvesting losses reduces taxable income for this year, putting money back in your client’s pocket.
- Increased returns long-term – Deferred taxes can remain invested and compound over time. This can boost portfolio value down the road.
It’s an opportunity to save on taxes and potentially improve returns. Tax-loss harvesting puts losses to good use.
What Are Some Key Considerations?
While tax-loss harvesting can provide benefits, there are some key factors to consider:
- Tax impact depends on your client’s unique capital gains and losses for the year
- Be aware of the wash sale rule if repurchasing the same security
- Transaction fees to sell at a loss reduce net tax benefit
- Make sure losses align with long-term investment strategy
- Tax-deferred accounts don’t benefit from tax-loss harvesting
How Can You Discuss This with Clients?
Here are some tips for effectively communicating with clients:
- Explain the basics of how tax-loss harvesting works
- Quantify potential tax savings based on their realized gains/losses
- Discuss pros and cons and how it fits their situation
- Review holdings to identify tax-loss harvesting opportunities
- Consider doing partial sell-offs to balance taxes and strategy
- Coordinate with their tax preparer for proper reporting
The key is framing this as a way to add value through potential tax savings and improved returns over time. Present tax-loss harvesting as another service you provide to help them reach their financial goals. With the right communication, clients will see the value.
Reaching out now to schedule year-end reviews positions you to deliver this added benefit to clients. Tax-loss harvesting can become an integral part of your suite of wealth management offerings.
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