A smart tax strategy for volatile markets

Key Points

  • With tax-loss harvesting, you sell an investment at a loss to offset capital gains you realize elsewhere in your portfolio.
  • A higher tax rate applies to any short-term gains you take, so first consider taking your short-term losses for a more substantial tax benefit.
  • As you decide which assets to sell at a loss, start with those that no longer fit your investment strategy, have low growth potential or are easily replaceable with investments with higher total return potential.

In a well-diversified portfolio, some investments will increase in value over time while others will decrease. While no one likes losses, you may be able use them to generate a positive result: a lower tax bill for a given calendar year.

This is called tax-loss harvesting. Here’s what you need to know if you decide to review your investments with your Ameriprise advisor and tax professional.

Consider both 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 2019 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 of the higher tax rate for short-term gains, focusing on short-term losses can have a more substantial effect on your tax savings than 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.

Maintain 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, work with your advisor to maintain your asset allocation and diversification and keep these tips in mind:

  • As you decide which assets to sell at a loss, consider starting with those that no longer fit your investment strategy, have low growth potential or are easily replaceable with investments with higher potential return.
  • Reinvest the proceeds from what you sold, and stay true to your risk tolerance.
  • Comply with the wash-sale rule. This prevents you from realizing a capital loss when you sell a security at a loss and, within 30 days before or after the sale, you buy another one that is “substantially identical.” After the 30-day wait period, you can buy back the original security if it still fits with your long-term investment strategy.

Work with your Ameriprise advisor

If you are considering tax-loss harvesting, it’s important to work with your Ameriprise financial advisor to stay aligned to your personalized asset allocation and diversification strategies. Both are important considerations to help you enhance return potential and mitigate risks over the long term, across periods of market volatility and all phases of the economic cycle.

Since taxes can influence your financial planning decisions, your Ameriprise advisor can collaborate with your tax professional to help 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.