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 gainsTwo types of gains — short-term and long-term — have a considerable effect on the tax treatment in your portfolio.
Here are key differences between the two tax treatments:
Matching investment gains and lossesThe 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 portfolioYou 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:
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.
Bronwyn Martin, Financial Advisor
Martin's Financial Consulting Group