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Tax Loss Harvesting as a resident

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  • Tax Loss Harvesting as a resident

    Hey guys,

    So I just started seriously investing around 9 months ago now and have been putting money in both taxable and tax-deferred or Roth since that time. I'm a resident, but had some money saved up from prior to medical school, so I now have a little over 50k in taxable accounts, 26k in Roth (some is older or trad conversion), and 4k in tax-deferred.

     

    I don't know exactly how much I'm down in all of my taxable accounts since starting to seriously invest last year, but I know my Betterment account is currently ~2,500 down from the original 14k. I'm sure my other taxable accounts at Fidelity and Vanguard are down a bit too.

     

    It would be pretty simple for me to sell my entire Betterment account. I started there but after learning more I've been thinking about getting outta there and investing only at Vanguard (where my primary taxable account is) and Fidelity (where an old UTMA and my Roth and 403b/457 are). I could re-direct my 403b/457/DCP plans that will be contributed to Feb 1st to a Target Date fund (60% goes to that already), which wouldn't trigger a wash sale. Then, I could re-invest my Betterment sale monies into Vanguard in a non-identical fund.

     

    My main question is this -- is it worth it, since my income will only increase in the years to come? If I tax-loss now, won't it just re-set my basis lower and then at some point whenever I actually sell I'll have to pay the difference, right? Any thoughts on this? I think my main goal will actually just be to hold the funds for indefinitely and try to survive on dividends whenever I'm ready to retire, so, theoretically, the tax basis should reset if it gets passed on to my kids, right? If that's the case, should I go ahead and tax-loss harvest now?

     

    Thanks! Sorry that was so long. Also, please feel free to point out any incorrect thoughts or inconsistencies in my planning, since tax code and planning is probably my weakest area of finance.

  • #2
    Do NOT tax loss harvest now. You're trading your current marginal income tax rate (probably 15%) for your future long term capital gains rate… which is probably 15, 20, or 25%. See how that math does not work out?

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    • #3
      My future long term capital gains rate would only be 20% if I sell at the peak of my income earning years, right? Which I hopefully wouldn't have any reason to do...

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      • #4
        Not many residents are going to have a taxable account, or not one large enough to make TLH worthwhile.  If you do though, it's not a bad thing to do.  You just won't benefit as much as those of us in higher tax brackets (your tax bracket will be smaller).

        Also, LTCG can be much higher than 20%.  If you live in CA and are in the top tax bracket with an AGI over about $525,000, you're looking at 20% federal, 3.8% medicare, 12.3% state = 36.1% LTCG tax.

        State tax is not often mentioned, but most states tax LTCG at state income tax rates (if they have one).

         

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        • #5
          Thanks for the responses guys. I'm in California now but expect to be somewhere else (likely back in Florida, with no state taxes) by retirement. TLH now would probably garner me about 2 years of the 3k tax deduction, but of course you're right that it won't lower my taxes all that much right now...especially since I put quite a bit of my income into tax-deferred each year.

          Is it possible to "save" the tax deductions for a few years? I know you can use extra in years to come but could I TLH now and use the deduction once I'm an attending? Thanks!

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          • #6
            You can "save" it by not harvesting now. That way your basis stays where it is instead of being reset. (Of course if the losses go away before you harvest then they can't be harvested later.)

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            • #7
              I agree that in your low tax bracket as a resident, it's not as advantageous to TLH now.  You can carry forward losses exceeding $3000.  Your TLH now would effectively amount to a tax bill that is only a couple of hundred dollars lower.  However, since we are only talking about the difference of a couple of hundred dollars, it may be worth it to you psychologically to keep your investments in one place (Vanguard).  Heck, it might even be advantageous to do so if it then makes you eligible for the lower cost admiral shares.

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              • #8
                It depends. What will you do with the appreciated shares? If you're going to donate them to charity, then might as well tax loss harvest, even at a lower bracket. Of course, if you're in the 0% LTCGs bracket, you should be tax-GAIN harvesting, not tax-LOSS harvesting.

                It's not a common issue. Most residents have far better uses for their money than a taxable investing account- Roth IRA(s), 403(b), paying off student loans, saving up a downpayment, getting an emergency fund etc.
                Helping those who wear the white coat get a fair shake on Wall Street since 2011

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