If you are like me, you owe taxes to the IRS each year. This could be due to several factors including, not having enough tax credits or deductions or having too little withheld from your paycheck. If this is your situation, you are probably wondering how do you leverage losses to lower your tax bill. Find out how selling on a loss can help solve this problem.
Tax Loss Harvesting
If you are into stocks, you know there is value in holding v.s trading. When you hold stocks longer than one year, you pay fewer taxes on gains than selling before then. Aside from long term holds, you can use stocks that have a significant loss in value as a buffer for your tax bill. You can do this by either offsetting capital gains exposure or limiting tax exposure. Be sure to sell these failing stocks before the end of the tax year. You can write off and reduce your tax liable income dollar for dollar up to $3,000.
When using this strategy, be sure to avoid a wash sale. This happens when you sell a stock at a loss and then repurchase it within a limited timeframe. The timeframe is typically 30 days. If you repurchase the shares before the thirty days expires, you will be unable to use your losses to lower your tax liability.
Carrying Forwards Losses
If you have more losses than the max contribution, you can carry over those losses. You can carry $3,000 in losses over each year until it is exhausted. This helps you limit your tax liability in future years. If you have a business that suffered losses, the carry-forward provision also works. For more information on the carrying forward provisions, visit this link.
Paying taxes can be a bummer. Hopefully, you better understand how selling on a loss can be beneficial towards reducing your tax liability at the end of the year. For more information be sure to check out the posted video.