Power Up Wealth podcast – The Power of Tax-Loss Harvesting – Episode 30 transcript:
Sharla Jessop 0:00
Tax-loss harvesting is one way to make lemonade out of lemons. I’m Sharla Jessop, and today my guest and colleague, Mikal Aune, will explain the benefits of this valuable tax planning strategy.
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Mikal, thank you for joining me today.
Mikal Aune 0:47
Glad to be here, Sharla.
Sharla Jessop 0:48
Mikal is the Vice President of Wealth Management at Smedley Financial, and he holds a CFP designation and an MBA. Mikal, there are so many tax planning strategies. Why do you think tax-loss harvesting is important to talk about today?
Mikal Aune 1:03
This is a year when most things are down. And if you’re going to do tax-loss harvesting, you have to have things that are down and in any given year people will have certain investments that are down and you can do little things here and there. But this is one year where most things are down, which makes it for a perfect opportunity to do some tax-loss harvesting.
Sharla Jessop 1:22
That’s almost like the perfect storm.
Mikal Aune 1:24
In a lot of ways, it is. It’s a perfect storm. This is why we’re saying we’re making lemonade out of lemons because it’s a bad year. The stock market’s down. Is there anything that you can do to help your situation?
Sharla Jessop 1:35
Tell us a little bit about tax-loss harvesting.
Mikal Aune 1:40
The whole idea behind it is saying I have things that have gains. I’ve held them for a long time I want to sell it but I have hold held on to it because if I do sell it, I have to pay taxes on the gains that I have. Tax-loss harvesting comes in and says alright, I can sell that thing that has a gain and sell something else that has a loss and offset the two so that I don’t end up paying any taxes.
Sharla Jessop 2:01
Can this be done in any type of account? Or does it have to be in a certain type?
Mikal Aune 2:05
They can only be done in non-retirement accounts. So if you have an individual account in your name, joint account with the spouse, or trust account, those accounts, you can do it. If you have a 401(k), IRA, Roth, it does not work in a 401(k) or an IRA or Roth.
Sharla Jessop 2:22
After-tax money basically. Money that you’ve invested separately. So give us some examples of how that would be done.
Mikal Aune 2:29
Yeah, let’s say you bought Apple stock a long time ago, and it’s appreciated a lot in value and you love Apple. You’re gonna hold on to it for a while. But you wouldn’t mind selling some of it if you can do it without having to pay taxes on it. So let’s say the same person also bought some Bitcoin right at the peak, perfect timing, you know, it’s down over 70% or so. You’re like oof, I made a bad decision there. Everybody does. So what you can do though, is say I want to sell a little bit of or a good portion of my Apple stock, and I’m going to sell my Bitcoin to help offset the gains that I have an Apple, okay. So there’s things that you have to keep in mind as you do this. And some people are like, well, gosh, what if I want to hold on to my Apple stock? Well, you still can, right? You don’t have to sell it and then just never get back into it. There’s some rules that you have to pay attention to as you’re doing this. So one of them is a wash sale rule. And the wash sale rule says if I sell something at a loss, I have to wait for more than 30 days to buy the same thing back or something that’s substantially similar. If I have something that’s different that I want to buy right back you can do that, not a problem. But if I sell Bitcoin and I want to buy back Bitcoin actual Bitcoin right at the same time, you have to wait until the 31st day to do so.
Sharla Jessop 3:47
But you can buy something similar it. So if you’re in the tech, and you’re selling something that’s a tech investment, you can turn around and buy a different tech investment. If you’re selling at a loss and avoid the wash sale rule.
Mikal Aune 3:59
Right. If I sold Bitcoin and I bought Solana or Avalanche, right, I can move it to another coin and not have to worry about buying something that’s substantially similar.
Sharla Jessop 4:10
And what about buying back the stock, the appreciated stock, Apple stock.
Mikal Aune 4:14
So that’s the cool thing is because it’s appreciated, you sold it at a gain, you can buy it back the next day. So you don’t really have to worry about well, what about timing? Do I want to sell it a loss? You know, if it’s down? Does it keep going down? Or is it gonna go back up? You don’t have to worry about that. You just say I’m gonna buy it back the next day. Because I sold it at a gain, I can do that.
Sharla Jessop 4:35
You know I think a lot of people are not really aware of this tax planning strategy. They don’t think about it. Their accountant isn’t bringing it up or their CPA isn’t bringing it up to them because they generally deal with things after the fact not before the year end. So it’s a great time to talk to somebody.
Mikal Aune 4:53
It’s a great time to talk to us because we also hold your investments, your CPA doesn’t. They don’t know what’s happening inside your investments during the year and we do. And we can look at it and, you know, look under the hood of the car and say, hey, you do have a lot of losses in this account and you have some gains, let’s sell these two, and we can offset it. And then you don’t have to pay any taxes on on whatever we sell. We love to work with CPAs and coordinate to make sure that everybody’s on the same page. Because a lot of times too, people have things that are outside of our purview. Maybe they sold a rental property during that year and we don’t know about it. If we communicate with them and communicate with the CPA, then we can make sure that your tax planning is done right. And that we can help set you up and save you potentially a boatload in taxes.
Sharla Jessop 5:38
Especially in a year like this year, when it’s painful, it’s nice to know that that you can take advantage of still some tax planning. This is just one strategy. And there is a world, a multitude of strategies when it comes to taxes and planning. So sometimes in many investments, you receive a distribution from an investment company. Let’s say you hold an investment in in a mutual fund, for example. And that mutual fund has a capital gain distribution that you don’t really have control about or even know about until it hits. Generally at the end of the year.
Mikal Aune 6:12
Yeah. So you have to be wise in your tax planning. A lot of things we try to do during the year, some things we wait to, we won’t know until like December 15. And so we’re trying to do some tax-loss harvesting right at the end of the year, or try to mitigate what’s happened. Some of it you have to pay attention to what is being paid out and know when it is taxed. In every single year you will have dividends and interest that is paid out. And every year, you have to pay tax on that, you don’t get a choice. It’s just like the bank, you know, I have money in a savings account. It’s not paying a whole lot in interest. But whatever it paid, I have to pay tax on it in that year. And it’s taxed at my ordinary income tax rate. Now we move into the next category, which is capital gains or losses. And so capital gains are I bought an item I hold on to it for time and I sell it. If I held it for less than a year, it’s a short-term gain. If I held it for longer than a year, it’s a long-term gain. So if it’s a short-term gain, it’s going to be taxed as my ordinary income. There’s no preferential tax treatment to it. If it’s a long-term gain, it’s going to be taxed at long-term capital gains rates, which are always lower than ordinary income rates. So ordinary income, the highest tax bracket right now is 37%. But my long-term capital gain rate, my maximum rate is 20%. So that can be a substantial savings for a lot of people to choose to realize long-term gains, rather than taking short-term gains. So you have to pay attention to when you bought it, when you’re going to sell it. You have to know too that if you sell a short-term gain and a short-term loss, those can offset first. And if you sell a long-term loss, you can offset that with long-term gain. So short-term goes against short-term first. Long-term goes against long-term first, then anything that’s left over can offset the other. Like if you have short-term losses, they can offset long-term gains. If you don’t have any other short-term gains, if that makes sense.
Sharla Jessop 8:08
Yeah, it’s kind of confusing. I can see why it’s so important to get someone involved who understands the strategy. And rather than just trying to do it on your own, you have a professional who’s helping you do that planning,
Mikal Aune 8:19
Yeah, cause sometimes it’s better to choose to realize the short-term loss in one year, because you can carry over up to $3,000 in losses. So if you have losses in a year, you may not want to offset all of them, you want to have $3,000 that you can use to offset ordinary income. And so it might be beneficial to say let’s wait until next year to realize a gain, just so that we do have losses. There’s a lot of tax strategies. And you really should consult a professional that knows and deals with this all the time, you know, just like one of our private wealth managers or your CPA, that can be proactive about it, and not just somebody that’s going to be retroactive, and just, oh, give me your information and I’ll file your tax return.
Sharla Jessop 8:58
You know, I also think that it’s important for people to understand that even though you’re doing the planning this year, it’s planning that couldn’t go on for years, because, as Mikal said, you can’t maybe use all of the tax harvesting this year, and you might still have some tax losses to carry forward. But in the future, you’re going to have gains. This is a pretty rough year.
Mikal Aune 9:17
Yeah.
Sharla Jessop 9:18
There’s a lot of losses out there. But this isn’t a normal year, you know, look back over the last several years we’ve had. So if you can carry those forward, that’s a great planning opportunity that is not just for 2022. It also benefits you might be for 2023 and beyond.
Mikal Aune 9:32
Yeah, you can do it for years into the future. And in 2021, we had a lot of issues because we didn’t have losses that we could use. And so we had a lot of people that were like, okay, I need money and I have to sell this asset. Well, they had to pay taxes. And so there weren’t a lot of options. Where this year, we have options, and that’s that’s how you’re making lemonade out of lemons as you have the option to say, hey, is there something that I’m holding that I can offset? And like you said that’s just one of the planning tools that we have just looking at your taxes only. And there’s so many other tax planning tools that it really is beneficial to meet with a private wealth manager or your CPA. CPA’s like it when you, you’re proactive with them to and say, hey, I was thinking about this, what do you think? You know, I talk to a lot of CPAs and many times they come back and they’re like, oh, I had this client that just came and told me this, that it’s too late. If they did something before the end of the year, we could have done something about it. And so I think a lot of times communication is the key.
Sharla Jessop 10:30
I think that’s true. Oftentimes, we think of talk reaching out to our tax professional, just as we’re preparing taxes, which is always after the fact. Where everything for taxes has to be done within a calendar year of the prior calendar year.
Mikal Aune 10:43
Yeah, exactly. So that a lot of times, it’s like your, your time to do tax planning is now in tax preparation is what happens next year.
Sharla Jessop 10:51
So tell us about some of these other tax planning strategies, that would be beneficial.
Mikal Aune 10:56
There’s simple things that you can think about because making a 401(k) contribution that can reduce your income. If you’re not worried about reducing your income, you can do Roth conversions, which is a tax planning tool for the long-term future because I can choose to pay taxes now and avoid paying taxes in the future. If you’re over age 70 and a half, you can donate from an IRA to a charity and you can avoid paying taxes on that full donation which significantly reduces your income. It can reduce how much tax you’re paying on Social Security. And it can even avoid some of the Medicare taxes like there’s one called IRMAA that it can help you help protect you against some of those taxes if you use some of these tax planning tools.
Sharla Jessop 11:37
I think it would make sense for people, regardless of their situation to come in and talk with the advisor to understand what opportunities are available.
Mikal Aune 11:45
Yes, Sharla. There are definite opportunities. And they should meet with a qualified, either tax preparer like your CPA or with your private wealth manager so that we can plan out the future and make sure that you take advantage of those opportunities so that you can protect your hard earned money that you’ve been saving to try to make sure that you can live the life that you want.
Sharla Jessop 12:05
Yeah, there’s so many things we focus on, you know, growing our assets, protecting our assets that oftentimes I think people overlook the benefit of tax planning.
Mikal Aune 12:15
And tax planning is definitely one of those ways to protect what you already have.
Sharla Jessop 12:20
Good wisdom. Thank you, Mikal.
Shane Thomas 12:27
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn.
The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Lorayne B. Taylor, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
