Are you looking for ways to accumulate more wealth? One of the ways we help clients accrue more over the long-term is by applying tax-smart strategies that can help you keep more of what you’ve earned. By reducing the tax liabilities for your portfolio, you’ll potentially have more money to invest during your working years and more income to enjoy during retirement.
The Impact of Mutual Funds on Capital Gains
Mutual funds are popular with many investors due to their inherent diversification, professional management, and potential for lower risk than stocks. But there can be some downsides, too, especially regarding capital gains tax.
When you own stocks, you can decide the best time to sell based on their value and your current tax situation. For example, the fund manager chooses which assets to sell with mutual funds and then passes on those capital gains to you. In the worst-case scenario, they may decide to sell assets with significant gains shortly after you bought the fund. In this situation, you wouldn’t get the benefit of those gains, but you’d still be on the hook for the capital gains tax that goes with their distribution.1
Why Your Taxes Might Have Been Significantly Higher for 2021
Investors have enjoyed a long-term bull market, which has pushed mutual fund earnings higher. Although that’s a significant problem to have, more substantial gains equate to more potential taxes when fund managers sell assets to buy new positions or fund client redemptions.
One Strategy for Tax Reduction? Tax-Loss Harvesting
Tax-loss harvesting refers to identifying and selling an asset that has not performed as well and then reinvesting in other assets that might help strengthen your portfolio. The difference between the amount you initially paid for the asset and the sell price is then applied against future capital gains to help lower your tax bill. Tax losses can be used to offset your capital gains in the current taxable year and generate a $3,000 total loss. Any unused capital losses can be carried forward to subsequent years and used in the same manner.
You can deduct $3,000 of capital loss even if you have no capital gains each year. Up to $3,000 can be applied annually, with any additional amount carried over to subsequent years.
Although mutual funds only pay capital gains distributions in the fourth quarter, you shouldn’t wait until then to start accruing “tax assets.” Tax-loss harvesting can be applied throughout the year, and one of the best times to act is when the market is more volatile.
One of Many Tax-Saving Strategies
Of course, tax-loss harvesting is just one way we can help you reduce your annual tax bill without impacting your portfolio performance. Wealth management through a tax-focused lens can be applied across most of the financial decisions you’ll make in your lifetime — including investing, retirement spending, social security planning, and transferring wealth.
Contact our office today for a comprehensive review of your financial situation, including opportunities to potentially capitalize on tax solutions for all your financial planning needs. https://www.wehringwealthmanagement.com/contact