A smart tax strategy for stocks


 

Key Points

  • Your Ameriprise advisor will regularly review your investment portfolio with you.
  • A loss might help lower your tax bill through tax-loss harvesting.  
  • It is critical for your advisor to make recommendations in this area.

In a well-diversified portfolio, investments you selected may increase or decrease in value over time. You might be able use a loss to generate a lower tax bill for a given calendar year.

The process is called tax-loss harvesting. With recommendations from your advisor, you can immediately reinvest in an asset that offers a similar risk/return profile as what you sold. This enables you to stay invested and benefit from a potential future rally in stock prices.

Short-term and long-term gains

Two types of gains — short-term and long-term — have a considerable effect on the tax treatment in your portfolio.

  • Short-term capital gains are those you realize within one year of owning an investment.
  • Long-term capital gains are those you realize after one year of owning the investment.

 

Here are key differences between the two tax treatments:

  • Short-term capital gains. The tax rate for short-term gains is equal to your ordinary income tax rate (your “tax bracket”) during the year in which you sell the investment. Federal income tax brackets in 2020 range from 10% – 37%. State and local taxes could also come into play.
  • Long-term capital gains. When you sell an investment that you’ve held for more than a year, this tax rate generally is more favorable than short-term capital gains rates. Long-term capital gains tax rates are 0%, 15% or 20%, depending on your taxable income and filing status. Special long-term capital gains rates can apply to sales of certain real estate, collectibles and small-business stock.

 

Matching investment gains and losses

The U.S. tax code requires that losses first offset gains of the same type. For example, short-term losses will first offset short-term gains.

Because short-term gains have a higher tax rate, you may want to focus on short-term losses. This can provide more substantial tax savings (compared to long-term losses), especially if you are in a higher federal tax bracket.

If you didn’t have capital gains this year, you can use up to $3,000 in capital losses to reduce ordinary income. You can carry over any remaining net capital loss to future tax years until you use the loss.

 

Maintaining a diversified portfolio

You and your advisor can build a long-term investment portfolio based on your financial goals, asset allocation strategy and risk tolerance. This enables you to remain appropriately invested throughout all market cycles — a key step in growing wealth over time.

When harvesting losses in your portfolio, your advisor will help you stay aligned to your asset allocation and risk tolerance. This could include:

  • Selling assets that no longer fit your investment strategy.
  • Reinvesting in appropriate assets with higher growth potential.
  • Compliance with the wash-sale rule, which prohibits buying a “substantially identical” asset within 30 days of the one you sold.

Work with your Ameriprise advisor

If you’d like to learn more about the benefits of tax-loss harvesting, it’s important to work with your Ameriprise financial advisor. They will make recommendations to help you remain appropriately invested.  

Since taxes can influence your financial planning decisions, your Ameriprise advisor can collaborate with your tax professional. This helps ensure your investment portfolio factors in your tax situation. If you want to work with a tax or legal professional, your advisor may be able to refer you to one.