Former Microsoft boss Steve Ballmer has been making headlines after an independent ProPublica investigation revealed he secured over $100 million in tax savings over several years, bending the wash sale rule that limits tax loss harvesting. Ballmer’s broker, Goldman Sachs, has acknowledged the findings and pledged to adjust its trading practices.
Yet well-heeled big-shot money managers aren’t the only ones who can turn their losses around. With proper execution following legal guidelines, tax-loss harvesting is a legitimate means to lighten an individual’s tax loads.
By pruning their portfolios of a few underperforming stocks, investors can offset the taxable profits realized by other equities, lowering their overall tax bill. For instance, if Ford Motors declines in value, it can be sold to counterbalance the appreciation of Amazon, offsetting the capital gains tax liability linked to Amazon’s performance.
“Tax-loss harvesting can be a great strategy during market downturns in non-qualified accounts,” says David Berns, Financial Planner at Truadvice Wealth Management. “Take 2022… markets were down around 20%, and we were able to harvest losses for our clients and carry forward those losses indefinitely.”
“Another advantage of doing tax-loss harvesting is you can use $3,000 against your ordinary income taxes each year,” Berns adds.Academic studies referenced by the Financial Times show harvesting can add 1-2% per year in after-tax returns to a diversified equity portfolio and even boost bond portfolios.
“Harvesting does play a big role in optimizing a client’s portfolio,” says Angela Dorsey, Founder and Financial Planner of Dorsey Wealth Management. “During 2022, there were great opportunities to do tax loss-harvesting that we haven’t had in years.”