As we head into the final stretch of 2016, it may make sense to take a step back and re-examine your portfolio with an eye towards tax harvesting and rebalancing. Now, this will depend on what investments are held in your portfolio, as to what realized/unrealized gains and losses you may have incurred. Mutual funds pass on the gains in the form of distributions throughout the year, while ETF’s only incur a gain or loss when they are sold. The ultimate goal of tax-harvesting is to sell some of your investments that have declined in value in order to offset some of the realized gains on other investments, therefore helping to reduce the taxes incurred.
The following steps should help give you an idea of where to start.
- Calculate the realized gains and organize them by time held, less than a year goes in the short-term bucket vs. those held longer than a year in the long-term bucket
- Estimate your potential tax liability based on your tax bracket
- Identify potential candidates for harvesting losses to help offset incurred gains
- Identify replacements for the sold security in order to maintain proper allocation
Without getting too far in the weeds, just remember that short-term capital gains or those on investments held less than a year typically have a higher tax rate than those held for more than a year.
Another important step is to use this opportunity to bring your allocation back in line with the desired exposure.
This information was provided for informational purposes and you should consult your tax advisor prior to engaging in any transactions.
