Taxes can be an investor’s biggest expense, and a well-informed financial advisor can help clients forecast their taxes and proactively identify ways to help them save throughout the year.
With tax loss harvesting, advisors strategically sell securities at a loss, allowing investors to offset capital gains, reduce their tax liability, and optimize long-term returns. This takes some planning, but it’s worth it. Based on research from Capital Sigma, active tax management can add up to 100 basis points annually!
Tax loss harvesting offers many benefits, including:
Reduced Tax Liability and Increased Earnings
By offsetting capital gains with capital losses, tax loss harvesting allows investors to minimize their tax burden and ultimately increase their after-tax returns.
- From 2021-2022, LibertyFi has seen a 280 percent increase in accounts with a tax loss harvest. 50 percent of them were harvested within the first three quarters of 2022.
- Additionally, 52 percent of all Unified Managed Accounts (UMAs) were actively tax managed.
Flexibility and Timing
Tax loss harvesting is not limited to a specific time of the year. Financial advisors can strategically identify and realize losses throughout the year to keep clients on track to meet their financial goals.
Future Tax Deductions
If capital losses exceed capital gains in a given year, the excess losses can be used to offset other taxable income up to a certain amount. This can result in tax savings not only in the current year but also in future years.
When you use the Envestnet platform, you can access tax loss harvesting tools to overlay in your account management. These tools can help you understand the investments’ tax efficiency and decide which accounts to include in a tax loss harvest.
Remember, tax loss harvesting is just one piece of the larger financial planning puzzle, and by incorporating it into your practice, you can deliver comprehensive and holistic wealth management services.