Tax Loss Harvesting Tips for High Net Worth Clients

Managing your wealth isn’t just about growing your investments—it’s also about finding smart ways to keep more of what you earn. For those with significant assets, tax loss harvesting is a handy strategy that turns market losses into tax savings. 

In this blog, we’ll break down what tax loss harvesting is, why it’s a smart move, and share some easy tips to help you make the most of it. Plus, we’ll touch on any risks to watch out for and show you how to fit tax loss harvesting into a broader wealth management plan.

Table of Contents

• What Is Tax Loss Harvesting?
• Why Tax Loss Harvesting is Good for High-Net-Worth Individuals
• Making the Most of Market Fluctuations
• How Much Can I Save with Tax Loss Harvesting?
• Tips for Implementing Tax Loss Harvesting
• Understanding the Risks of Tax Loss Harvesting

What is Tax Loss Harvesting?

Like we talked about above, tax loss harvesting is a savvy strategy that can help you cut down on your tax bill by making the most of investments that aren’t doing so well. 

Here’s the deal: when you sell an investment at a loss, you can use that loss to offset the gains you’ve made on other investments. So instead of paying taxes on all your gains, you get to subtract those losses from your taxable income, which means less money going to taxes. 

The trick is in the timing—by carefully choosing when to sell those underperforming assets, you can manage your tax liability without throwing off your overall investment strategy. It’s a smart way to turn a tough market into an opportunity to save more of your hard-earned cash, all while keeping your long-term financial goals on track.

Why Tax Loss Harvesting is Good for High-Net-Worth Individuals

For high-net-worth individuals, tax loss harvesting can be a game-changer. When you’re in a higher tax bracket, every dollar saved on taxes counts. By selling investments, you can lower your taxable income and free up cash to reinvest in more promising opportunities. 

This strategy not only helps you save on taxes but also gives you the flexibility to realign your investment portfolio to better suit your long-term goals. It’s a smart way to turn market losses into a win, allowing you to keep more of your wealth working for you while minimizing the impact of taxes.

Making the Most of Market Fluctuations

Tax loss harvesting can be particularly effective during times when the market is down. High-net-worth clients can use these market dips to their advantage by selling underperforming investments at a loss. These losses can then offset the gains from other investments, helping to lower your overall tax bill. The trick is to spot these opportunities when the market fluctuates and act quickly to benefit from them.

How Much Can I Save with Tax Loss Harvesting?

The savings you can achieve with tax loss harvesting depend on your individual financial situation, but there are some clear guidelines to keep in mind. If your capital losses exceed your capital gains, the IRS allows you to deduct up to $3,000 in net losses per year ($1,500 if you’re married filing separately) from your ordinary income. This can significantly reduce your taxable income and lower your tax bill, as losses will keep accumulating. 

If your net losses are greater than the allowed amount, you can carry over the excess to future tax years, providing ongoing tax relief. While the exact savings will vary based on your tax bracket and the size of your losses, tax loss harvesting can be a valuable strategy for keeping more of your money working for you over the long term. As you plan for the future, be sure to seek the assistance of a financial advisor. 

Tips for Implementing Tax Loss Harvesting

• Timing Matters: Keep an eye on your portfolio and think about harvesting losses near the end of the year. This way, you’ll have a better idea of your total capital gains and a greater understanding of how to best offset them 
  
  
• Look for the Right Moments: Watch for times when the market dips. These are often the best moments to sell off investments at a loss, especially if you have other investments that have done well. Market downturns can turn potential losses into tax-saving opportunities.
  
  
• Know the Wash-Sale Rule: When using tax loss harvesting, it's important to keep the IRS’s wash-sale rule in mind. This rule says that if you sell an investment at a loss and then buy the same or a very similar investment within 30 days before or after the sale, you can’t claim the loss on your taxes. But if you’re eager to stay invested in a particular sector, there’s a workaround. Instead of waiting, you can reinvest within the same sector—something that’s not too similar but still aligns with your overall strategy. This way, you avoid the wash-sale rule while keeping your investment goals on track.
  
  
• Make It Part of Your Wealth Management Plan: Tax loss harvesting shouldn’t be a one-off thing. It should be part of your bigger financial plan. Make sure it fits with your long-term goals and risk tolerance. Talk to your financial advisor to see how it fits into your overall wealth management strategy.
  
  
• Think About Your Long-Term Goals: While tax loss harvesting can save you money in the short term, don’t lose sight of your long-term investment strategy. Selling off investments just for the tax benefits could throw your portfolio out of balance. Work with your advisor to make sure your tax loss harvesting aligns with your overall financial goals.

Understanding the Risks of Tax Loss Harvesting

Tax loss harvesting can be beneficial, but it's important to be aware of the potential risks:

• Tax Rate Considerations: The effectiveness of tax loss harvesting depends on current capital gains tax rates. Federal tax rates for long-term gains range from 0% to 20%, with an additional 3.8% surtax for high-income earners. These rates can influence whether this strategy is beneficial in a given year.
  
  
• Alignment with Investment Strategy: Tax loss harvesting works best when it aligns with your broader investment strategy, particularly during portfolio rebalancing. It's important to avoid selling assets just for the tax break, especially if you expect the investment to recover soon.
  
  
• Potential for a Larger Future Capital Gain: Consistently using tax loss harvesting with the intention of repurchasing assets after the wash-sale period might lower your cost basis, leading to a larger capital gain when you eventually sell. While your current tax savings could offset future taxes, this depends on factors like inflation and future tax rates.

Work with a Professional for the Best Results

Tax loss harvesting can be a great way for high-net-worth individuals to save on taxes and keep their investments on track, especially during market fluctuations. But because this strategy can be complex, it’s important to plan carefully. Working with a tax professional can help you navigate the process and ensure you’re making the most of this strategy. Contact the MB Group today for assistance. 

Read More:

• 5 Tax Strategies for High Net Worth Individuals
• How High Net Worth Individuals can Plan for Retirement
• Tax Preparation Tips for High Net Worth Individuals