What's the big deal on TLH

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marcopolo
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Re: What's the big deal on TLH

Post by marcopolo »

international001 wrote: Sat May 21, 2022 7:00 pm
marcopolo wrote: Fri May 20, 2022 7:07 pm
TLH can cancel Capital Gains, which reduces your taxable income, creating more head room to make Roth Conversions at the current tax bracket.

Let's say your taxable income (absent TLH and Roth Conversions) comes to $60k after deductions, and includes $30k of capital gains.
For a married couple, that would allow ~$23k of Roth Conversions in the 12% tax bracket. Additional conversions would be taxed at higher rates.

If that couple does TLH to produce $30k in losses, that will cancel out the $30k in capital gains, leaving $30k of taxable income.
They can now do ~$53k of Roth Conversions in the 12% tax bracket.

So, while the TLH was kind of wasted (cancelling cap gains that would have been taxed at 0% LTCG rate anyway), it does provide some benefit by allowing additional Roth Conversions at a low rate.
Let'd assume all it's LTCG. Suppose $55k of regular income plus $30k of LTCG and $25k of standard deduction
12% tax bracket ends up at $83k.
You are going to be tax with regular income rates only $30k. Why can't you do $53k of roth conversions?
Because that's not how LTCG tax brackets work. They are stacked on top of ordinary income, not separate from them.

So, in your example, you would $55k + $30k + $53k = $138k of income.
After the $25k standard deduction, you would have $113k of taxable income.

This is above the 12% tax bracket as well as the 0% LTCG rate threshold.
So, this pushes some of your Roth conversion into the 27% marginal rate area (15% Cap Gains + 12% ordinary income).

But, if you took a TLH of $30k, that would cancel out the $30k of LTCG, leaving a taxable income of $83k, so all of the income (income the Roth Conversion) is taxed at 12% rate.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Counterpoint
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Re: What's the big deal on TLH

Post by Counterpoint »

muffins14 wrote: Mon May 16, 2022 7:01 am I commented in the other thread. If you can indeed have the gains in ten years treated as long-term gains, I think your benefit from the 30k loss would be more like $4k than $2k
Thanks for the comment - the reason I have a 28% CG rate and not lower, is that it includes state taxes and NIIT. Hence the lower PV benefit of only $2K in my case.

Some have misunderstood my valuing simplicity as implying that TLH is difficult to understand. That was not what I meant - for me simplicity means freeing my share of mind and time to focus on things that are more important to me. Take the example of repeatedly switching credit cards to generate bonus miles. Not difficult to understand, but to me this also would mean complexity that is not worth it for me (although others may find it worthwhile, and I don’t knock them for it).

Likewise I’m not for or against TLH. I’m just saying that it’s not automatically worth doing, and that the answer depends on your particular financial circumstances as well as your financial philosophy. That’s why I wanted to make a rough estimate of the potential benefit for me to see if it was worth it for me to do, and was soliciting feedback earlier on the other thread as to whether I was doing the calculation correctly: viewtopic.php?t=309048 (If you have comments on my specific situation, kindly reply on that thread so I don’t derail this one.)

I did the same thing in looking at how much estimated benefit there would be for us to do Roth conversions and setting up a DAF. It turned out that these had significant benefits for us (an estimated mid six figures in the case of Roth conversions) so well worth the effort. In comparison TLH benefits for us is negligible.

But that’s our situation because the time of reversal of the benefits (when we sell those securities) is only an estimated 10 years after the TLH event and the TLH amount was only $30K. For those who are doing TLH during early accumulation years with a longer time horizon till reversal, and can do it in greater amounts, the tradeoff would be different.

If I can expect to generate signficant benefits from TLH, I’d certainly be willing to do it and sacrifice some simplicity. But the key takeaway is that this decision can be highly variable depending on personal circumstances.
lazynovice
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Re: What's the big deal on TLH

Post by lazynovice »

international001 wrote: Fri May 20, 2022 6:42 pm ….
Anyway, if cap gain bracket is constant, there is no benefit.
https://www.investopedia.com/terms/t/ti ... fmoney.asp
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Yesterdaysnews
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Re: What's the big deal on TLH

Post by Yesterdaysnews »

With VTI one can use ITOT, but no good TLH partner for VT, or is there?
lazynovice
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Re: What's the big deal on TLH

Post by lazynovice »

Yesterdaysnews wrote: Sun May 22, 2022 1:01 pm With VTI one can use ITOT, but no good TLH partner for VT, or is there?
https://www.bogleheads.org/wiki/ETFs_for_Bogleheads

SPGM is similar. You have to decide if it is “good.”

Otherwise, VXUS/VTI or IXUS/VXUS and then you get the foreign tax credit as well.
international001
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Re: What's the big deal on TLH

Post by international001 »

lazynovice wrote: Sun May 22, 2022 12:55 pm
international001 wrote: Fri May 20, 2022 6:42 pm ….
Anyway, if cap gain bracket is constant, there is no benefit.
https://www.investopedia.com/terms/t/ti ... fmoney.asp
huh?
What does this have to do with TLH in my scenario? I'm not talking about the $3k deduction at all
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Re: What's the big deal on TLH

Post by lazynovice »

international001 wrote: Sun May 22, 2022 4:26 pm
lazynovice wrote: Sun May 22, 2022 12:55 pm
international001 wrote: Fri May 20, 2022 6:42 pm ….
Anyway, if cap gain bracket is constant, there is no benefit.
https://www.investopedia.com/terms/t/ti ... fmoney.asp
huh?
What does this have to do with TLH in my scenario? I'm not talking about the $3k deduction at all
So your scenario is one where capital gains rate is constant and there is no need for a 3,000 deduction today yielding you additional money to invest to use in the future. That is a very specific scenario that presumes higher ordinary rates in retirement I guess.
international001
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Re: What's the big deal on TLH

Post by international001 »

lazynovice wrote: Sun May 22, 2022 5:06 pm
international001 wrote: Sun May 22, 2022 4:26 pm
lazynovice wrote: Sun May 22, 2022 12:55 pm
international001 wrote: Fri May 20, 2022 6:42 pm ….
Anyway, if cap gain bracket is constant, there is no benefit.
https://www.investopedia.com/terms/t/ti ... fmoney.asp
huh?
What does this have to do with TLH in my scenario? I'm not talking about the $3k deduction at all
So your scenario is one where capital gains rate is constant and there is no need for a 3,000 deduction today yielding you additional money to invest to use in the future. That is a very specific scenario that presumes higher ordinary rates in retirement I guess.
It's jut an hypothetical scenario for illustration purposes. Consider you don't have any regular income ever (you could consider also that $3k is negligible). Your capital gain tax rate is constant. TLH has no benefits.
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Raraculus
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Re: What's the big deal on TLH

Post by Raraculus »

I think TLH is a nice tool in the investor's toolkit. These opportunities rarely come by, as the equity markets have largely trended upwards through the years. I already did my fair share of TLH this year - making lemonade. :beer

Here's how TLH helped me; I was a newbie investor in 2019, and 2020 was indeed trial by fire! :shock: After reading the ins/outs of TLH, I was able to TLH some equities in 2020. It was easier than I thought. Fast forward to 2021, I had a great year, investing-wise. I have W-2 income that puts me in the 22% tax bracket. I maxed out my retirement contributions, pushing me back into the 12% bracket. I sold stocks throughout 2021 to fund my meager lifestyle, to replace the W-2 income that was leaking out to my retirement accounts. I sold almost $16,000 worth of equities, all at 0% LTCG! TLH helped make it possible.

Recently, ProPublica wrote up a great article covering a specific investor's (Jeff Yass) heavy use of TLH by playing both sides of equities, similar to straddles. This guy would sell the losing stock for a STCG, and wait one day later to sell the winning stock for a LTCG. Viola... Huge profits taxed at 20% rates. Granted, the article stated that this tax avoidance was very aggressive and may run afoul of IRS regulations.

So, yeah, TLH is a big deal.
Statistical
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Re: What's the big deal on TLH

Post by Statistical »

international001 wrote: Mon May 23, 2022 5:37 pm
lazynovice wrote: Sun May 22, 2022 5:06 pm
international001 wrote: Sun May 22, 2022 4:26 pm
lazynovice wrote: Sun May 22, 2022 12:55 pm
international001 wrote: Fri May 20, 2022 6:42 pm ….
Anyway, if cap gain bracket is constant, there is no benefit.
https://www.investopedia.com/terms/t/ti ... fmoney.asp
huh?
What does this have to do with TLH in my scenario? I'm not talking about the $3k deduction at all
So your scenario is one where capital gains rate is constant and there is no need for a 3,000 deduction today yielding you additional money to invest to use in the future. That is a very specific scenario that presumes higher ordinary rates in retirement I guess.
It's jut an hypothetical scenario for illustration purposes. Consider you don't have any regular income ever (you could consider also that $3k is negligible). Your capital gain tax rate is constant. TLH has no benefits.
Even in that super dubious scenario there is an advantage. The loss can offset gains and thus avoid taxes next year. Yes you will end up paying that back via lower cost-basis when the lossed stock is also sold but in a future year. Getting a tax savings next year and paying it back in 10 years meaning 10 years the saved taxes could be invested growing in wealth.

If the IRS announced a program where you could reduce your taxes due by $2,000 next year BUT you would have $2,000 in taxes added to your tax return in 2033 with no interest or penalties would you take it? I sure would. Zero change in taxes paid but you are gaining the time value of money hence the prior posters link.
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Flobes
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Re: What's the big deal on TLH

Post by Flobes »

boater07 wrote: Thu May 12, 2022 9:15 pm What's the big deal about deducting a 3000 loss. Sure, why not take it, but meaningless in a large portfolio.
Taking that $3000/year loss each year can be even more beneficial.

For those who are dancing on the AGI/MAGI line, starting a 1040 with minus $3000 can be very helpful for garnering particular tax credits, avoiding cliffs, and limboing under some phaseout limits.

Some examples: qualifying for ACA subsidies and cost-sharing benefits, Savers credit, Roth contributions, IRA deductibility, student loans interest deduction, IRMAA, taxability of Social Security income, education credits, NIIT, and the list goes on and on.
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Re: What's the big deal on TLH

Post by GaryA505 »

Flobes wrote: Tue Jun 28, 2022 10:55 am
boater07 wrote: Thu May 12, 2022 9:15 pm What's the big deal about deducting a 3000 loss. Sure, why not take it, but meaningless in a large portfolio.
Taking that $3000/year loss each year can be even more beneficial.

For those who are dancing on the AGI/MAGI line, starting a 1040 with minus $3000 can be very helpful for garnering particular tax credits, avoiding cliffs, and limboing under some phaseout limits.

Some examples: qualifying for ACA subsidies and cost-sharing benefits, Savers credit, Roth contributions, IRA deductibility, student loans interest deduction, IRMAA, taxability of Social Security income, education credits, NIIT, and the list goes on and on.
I did some TLH this year on muni funds. I wasn't aware that TLH was useful for IRMAA, which I have to be aware of this year. Thanks!
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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dratkinson
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Re: What's the big deal on TLH

Post by dratkinson »

Late to the party.

The "biggest deal" with TLHing is that it teaches new investors to not fear market corrections.

Why? Because it's impossible to hold two conflicting ideas in our mind at the same time: (1) we can not be worrying about our portfolio losing value, (2) while we are hoping to maximize a TLH.

Learning to not fear market corrections translates directly into making it much easier for new investors to "stay the course" through them, when they are (correctly) seen as opportunities to TLH... and buy on sale.


Then, after learning the most important lesson (the biggest deal) and now more senior investors, they can worry about TLHing's minutia: possible future taxation on the reduced cost basis of TLH'd shares, is a potential TLH worth our effort/time (remaining) to pick up every dollar, how harvesting a LTCG wastes the more tax-efficient use of a carryover loss when it (carryover loss) is not used to offset ordinary income/dividends,....
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feh
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Re: What's the big deal on TLH

Post by feh »

dratkinson wrote: Wed Jun 29, 2022 4:00 pm
Why? Because it's impossible to hold two conflicting ideas in our mind at the same time: (1) we can not be worrying about our portfolio losing value, (2) while we are hoping to maximize a TLH.
Somewhat off-topic, but humans are quite capable of rationalizing conflicting ideas (unfortunately).

https://en.wikipedia.org/wiki/Cognitive ... nfirmation
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dratkinson
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Re: What's the big deal on TLH

Post by dratkinson »

feh wrote: Thu Jun 30, 2022 7:03 am
dratkinson wrote: Wed Jun 29, 2022 4:00 pm
Why? Because it's impossible to hold two conflicting ideas in our mind at the same time: (1) we can not be worrying about our portfolio losing value, (2) while we are hoping to maximize a TLH.
Somewhat off-topic, but humans are quite capable of rationalizing conflicting ideas (unfortunately).

https://en.wikipedia.org/wiki/Cognitive ... nfirmation
Point conceded. I was guilty of same when* I continued to loan money to a WB (worthless brother) after an unbroken string of failed outcomes. (* Past tense, best viewed in a rear view mirror. A tax deduction/carryover loss reduced the sting.)


I believe participation in this forum has reduced the number/frequency of my bad decisions.
--It's more difficult to make bad decisions when BHs with longer memories/more experience say to develop a viable long-term plan, and stick to it.
--It's nice to have same guide us to what a viable long-term plan looks like, and provide chapter and verse to justify their reasoning.
--It's nice to have same double-check our logic before we act.

The fact that all of our plans are somewhat alike, and somewhat different does indicate that mental weighting of the pieces-parts is going on, and with different conclusions reached to tailor each plan to our specific situation/needs. As expected.

So deciding for/against TLHing is correct for different individuals. But for those who decide for tax/monetary reasons to TLH, they will also unintentionally learn to fear less market corrections.



Edit. Second thoughts.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
international001
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Re: What's the big deal on TLH

Post by international001 »

Statistical wrote: Tue Jun 28, 2022 10:41 am

Even in that super dubious scenario there is an advantage. The loss can offset gains and thus avoid taxes next year. Yes you will end up paying that back via lower cost-basis when the lossed stock is also sold but in a future year. Getting a tax savings next year and paying it back in 10 years meaning 10 years the saved taxes could be invested growing in wealth.

If the IRS announced a program where you could reduce your taxes due by $2,000 next year BUT you would have $2,000 in taxes added to your tax return in 2033 with no interest or penalties would you take it? I sure would. Zero change in taxes paid but you are gaining the time value of money hence the prior posters link.
(assume LTTC = 15%)

Assume you save $2000 taxes this year via TLH (taxed at 15%). You invest them and get a return in 10 years (let's say 100% return, so you have extra $4000). You'll have to pay the same 15% on the extra $4000. So you get $4000*(1-15%)=$3400

If you paid at the beginning, you have extra $2000*(1-15%)=$1700. After 10 years, you have extra $1700*(1+100%)(1-15%)=$2850

IS this your math?
international001
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Re: What's the big deal on TLH

Post by international001 »

Flobes wrote: Tue Jun 28, 2022 10:55 am
boater07 wrote: Thu May 12, 2022 9:15 pm What's the big deal about deducting a 3000 loss. Sure, why not take it, but meaningless in a large portfolio.
Taking that $3000/year loss each year can be even more beneficial.

For those who are dancing on the AGI/MAGI line, starting a 1040 with minus $3000 can be very helpful for garnering particular tax credits, avoiding cliffs, and limboing under some phaseout limits.

Some examples: qualifying for ACA subsidies and cost-sharing benefits, Savers credit, Roth contributions, IRA deductibility, student loans interest deduction, IRMAA, taxability of Social Security income, education credits, NIIT, and the list goes on and on.
That's like changing your *effective* tax rate. Of course, worth it. So do it if it's your case. But I don't think it's this is the topic under discussion.
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Re: What's the big deal on TLH

Post by VanGar+Goyle »

international001 wrote: Fri May 20, 2022 6:49 pm
marcopolo wrote: Mon May 16, 2022 9:16 pm One thing I am considering is to do the TLH anyway, and create a little more room to do Roth Conversions in the 12% tax bracket.
How would TLH affect Roth conversions?
They can indirectly affect Roth conversions, by reducing your [non-capital gains] income by $3000.
This way you could do $3000 more of Roth conversions and still stay in the 12% tax bracket.
If you were in a higher tax bracket, TLH could reduce Net Investment Income tax ( 3.8% ).

These are not huge net numbers, but if you can TLH for 10 years, you have a nice vacation or two.
international001
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Re: What's the big deal on TLH

Post by international001 »

VanGar+Goyle wrote: Sun Jul 03, 2022 9:18 am
international001 wrote: Fri May 20, 2022 6:49 pm
marcopolo wrote: Mon May 16, 2022 9:16 pm One thing I am considering is to do the TLH anyway, and create a little more room to do Roth Conversions in the 12% tax bracket.
How would TLH affect Roth conversions?
They can indirectly affect Roth conversions, by reducing your [non-capital gains] income by $3000.
This way you could do $3000 more of Roth conversions and still stay in the 12% tax bracket.
If you were in a higher tax bracket, TLH could reduce Net Investment Income tax ( 3.8% ).

These are not huge net numbers, but if you can TLH for 10 years, you have a nice vacation or two.
Ok.. sure. That's a secondary effect of reducing your ordinary income.
Still, I'm trying to see the advantages beyond those $3k.
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Re: What's the big deal on TLH

Post by dratkinson »

international001 wrote: Sun Jul 03, 2022 5:16 pm
VanGar+Goyle wrote: Sun Jul 03, 2022 9:18 am
international001 wrote: Fri May 20, 2022 6:49 pm
marcopolo wrote: Mon May 16, 2022 9:16 pm One thing I am considering is to do the TLH anyway, and create a little more room to do Roth Conversions in the 12% tax bracket.
How would TLH affect Roth conversions?
They can indirectly affect Roth conversions, by reducing your [non-capital gains] income by $3000.
This way you could do $3000 more of Roth conversions and still stay in the 12% tax bracket.
If you were in a higher tax bracket, TLH could reduce Net Investment Income tax ( 3.8% ).

These are not huge net numbers, but if you can TLH for 10 years, you have a nice vacation or two.
Ok.. sure. That's a secondary effect of reducing your ordinary income.
Still, I'm trying to see the advantages beyond those $3k.
TLH/carryover loss offsets new annual CGs (dollar for dollar), which also reduces annual taxable income, so increases annual tax bracket headroom.

Assuming no new harvested losses, the amount by which our carryover loss is reduced (to offset CGs + 3K of ordinary income) should be equal to the amount of tax bracket headroom increased each year. Assuming we still have remaining carryover loss after tax filing, then the total headroom increase for the TY should be more that $3K.


I once tried to trace all of the pieces-parts though the tax forms. For 2021 TY....

Some stuff is easy to trace (e.g. internal LTCG from fund operation, 1099DIV box 2a, is traced to SchD line 13, new LTCG).

But I could never figure out how internal STCG from fund operation (included in 1099DIV box 1a) were broken out from ordinary dividends. STCG are CG so should be offset by any CL (current/carryover). So I gave up... since I don't really like messing with tax forms, just want to get through the process.
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yog
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Re: What's the big deal on TLH

Post by yog »

dratkinson wrote: Sun Jul 03, 2022 7:52 pm But I could never figure out how internal STCG from fund operation (included in 1099DIV box 1a) were broken out from ordinary dividends. STCG are CG so should be offset by any CL (current/carryover). So I gave up... since I don't really like messing with tax forms, just want to get through the process.
You are able to break everything out manually based on follow-up documentation brokers provide. For example, here is Vanguard's:
https://investor.vanguard.com/investor- ... ncome-2021
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Re: What's the big deal on TLH

Post by marcopolo »

international001 wrote: Sun Jul 03, 2022 5:16 pm
VanGar+Goyle wrote: Sun Jul 03, 2022 9:18 am
international001 wrote: Fri May 20, 2022 6:49 pm
marcopolo wrote: Mon May 16, 2022 9:16 pm One thing I am considering is to do the TLH anyway, and create a little more room to do Roth Conversions in the 12% tax bracket.
How would TLH affect Roth conversions?
They can indirectly affect Roth conversions, by reducing your [non-capital gains] income by $3000.
This way you could do $3000 more of Roth conversions and still stay in the 12% tax bracket.
If you were in a higher tax bracket, TLH could reduce Net Investment Income tax ( 3.8% ).

These are not huge net numbers, but if you can TLH for 10 years, you have a nice vacation or two.
Ok.. sure. That's a secondary effect of reducing your ordinary income.
Still, I'm trying to see the advantages beyond those $3k.
We are in early retirement years. Most of our income is in the form of dividends, cap gains distributions, and LTCG from selling assets in our taxable account to support our living expenses. Tax losses offset the cap gains dollar for dollar, leaving an additional dollar of space for Roth Conversion in the current tax bracket.
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Re: What's the big deal on TLH

Post by URSnshn »

It's a big deal and a worthwhile deal for some people to TLH. And it's not worth the time and energy for others. For those though who say it takes one or two clicks or who imply it isn't time consuming, I find that concerning. The actual act of TLH may not take a lot of time, but understanding your situation and the nuances involved can, for the newbie, take quite a bit of time and that is totally understandable. Of course, the only way you'll know is to get in and start learning.
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Re: What's the big deal on TLH

Post by GaryA505 »

This is my first year of TLH. Does TurboTax track the capital loss carry-over?
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: What's the big deal on TLH

Post by Richard1580 »

GaryA505 wrote: Mon Jul 04, 2022 3:19 pm This is my first year of TLH. Does TurboTax track the capital loss carry-over?
Yes.
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dratkinson
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Re: What's the big deal on TLH

Post by dratkinson »

Richard1580 wrote: Mon Jul 04, 2022 3:33 pm
GaryA505 wrote: Mon Jul 04, 2022 3:19 pm This is my first year of TLH. Does TurboTax track the capital loss carry-over?
Yes.
So too does the much cheaper OLT (online tax), one of the IRS free file options.

I assume all tax packages do (all should, since info is need on Sch D).

But maybe I spoke too soon. Some replies says TT can lose track of carryover data (if we: use a different TT ID, fail to import last tax data,...).
Question: https://www.google.com/search?&q=does+t ... yover+loss


I've done this so I could change tax packages. Every year I print all tax worksheets (carryover loss, depreciation schedule,...), and plan to use an override to reenter missing data if I move to a new tax package.

So if TT et al. forgets, it should be easy enough to reset it.


URSnshn wrote: Mon Jul 04, 2022 2:26 pm It's a big deal and a worthwhile deal for some people to TLH. And it's not worth the time and energy for others. For those though who say it takes one or two clicks or who imply it isn't time consuming, I find that concerning. The actual act of TLH may not take a lot of time, but understanding your situation and the nuances involved can, for the newbie, take quite a bit of time and that is totally understandable. Of course, the only way you'll know is to get in and start learning.
+1. The clicks to properly execute a TLH are the easy part. The required study to know when/what to click is the hard part... but doable*.


* (added) I use a checklist to ensure TLHing is doable. I have one "transactions execution checklist" for each fund, which lists all requirements to be met (tax code (fed, state), banking (ACH processing delays,...), brokerage (transaction limits/ordering to avoid fund lockout,...)), and checkoff each requirement when met. CYA: I double-check everything a few days later with a clear mind. (Have previously posted examples of my checklist.)

Notice the process of executing a successful TLH may run for parts of 3mos: (1st mo) last fund reinvestment, (2nd mo) TLH fund 31+ days later, (3rd mo) resume fund reinvesting 31+ days later. So creating/following a checklist is the low-stress way* for me to ensure/remember I've met all requirements and staying on course during those 3mos and "clicking" correctly.

* If I forget and think there's a problem during the 3mos: Did I remember to think about a situation/requirement? Yes I did, because it's on my checklist** and checked off. Problem solved, stop worrying, stay on course.

** If it's not on checklist, then resolve problem, and add it to checklist so I remember next time before TLHing, to keep my stress level low.



Edit. Second thoughts.
Last edited by dratkinson on Wed Jul 06, 2022 2:33 pm, edited 2 times in total.
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VanGar+Goyle
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Re: What's the big deal on TLH

Post by VanGar+Goyle »

feh wrote: Thu Jun 30, 2022 7:03 am
dratkinson wrote: Wed Jun 29, 2022 4:00 pm
Why? Because it's impossible to hold two conflicting ideas in our mind at the same time: (1) we can not be worrying about our portfolio losing value, (2) while we are hoping to maximize a TLH.
Somewhat off-topic, but humans are quite capable of rationalizing conflicting ideas (unfortunately).

https://en.wikipedia.org/wiki/Cognitive ... nfirmation
Definitely off topic, but two literary quotes:

F. Scott Fitzgerald
“the test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function."

John Keats
"Negative Capability, that is when man is capable of being in uncertainties, Mysteries, doubts, without any irritable reaching after fact & reason"

So perhaps someone could lose money in the market, but make ( some of ) it back in taxes.
GaryA505
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Re: What's the big deal on TLH

Post by GaryA505 »

I think this has been asked before but I can't find it. Can anyone confirm that carry-over cap losses can be used to offset ordinary income from RMDs in future years. For example, let's say I have $15000 in cap losses this year, to be carried over. For the next 5 years I have at least $3000 in income from RMDs only. Can I use $3000/year of the carry-over cap loss to offset the RMD income for each of those 5 years?
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Richard1580
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Re: What's the big deal on TLH

Post by Richard1580 »

GaryA505 wrote: Sat Jul 16, 2022 5:49 pm I think this has been asked before but I can't find it. Can anyone confirm that carry-over cap losses can be used to offset ordinary income from RMDs in future years. For example, let's say I have $15000 in cap losses this year, to be carried over. For the next 5 years I have at least $3000 in income from RMDs only. Can I use $3000/year of the carry-over cap loss to offset the RMD income for each of those 5 years?
Income is income. The answer is "yes."
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Re: What's the big deal on TLH

Post by GaryA505 »

OK, another question. In a given year, is there any limit to offsetting cap gains with cap losses. For example, if I have a loss of $100,000 on a bond fund does that offset a $100,000 gain on a stock fund?
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martincmartin
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Re: What's the big deal on TLH

Post by martincmartin »

GaryA505 wrote: Sat Jul 30, 2022 1:18 pm OK, another question. In a given year, is there any limit to offsetting cap gains with cap losses. For example, if I have a loss of $100,000 on a bond fund does that offset a $100,000 gain on a stock fund?
There's no limit I'm aware of.

Might want to check how your state handles these things too.

Edit: you can check the instructions for Schedule D to be sure. Looks like in Part I, you just total up all short term gains/losses, without applying any maximum or other limit. Same with Part II for long term. Then, at the start of Part III, you just add them. After that, I think everything depends on the sum.
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Re: What's the big deal on TLH

Post by Florida Orange »

Tax loss harvesting really just mitigates the loss. In order to tax loss harvest you have to have a loss.
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Re: What's the big deal on TLH

Post by GaryA505 »

Florida Orange wrote: Sat Jul 30, 2022 3:52 pm Tax loss harvesting really just mitigates the loss. In order to tax loss harvest you have to have a loss.
Yes, but here's where it's valuable. Let's say some of your taxable account is in a muni fund. This year interest rates have gone up and your muni fund took a beating. So, this year you do a TLH on the muni fund which results in a $18000 loss on paper. You have no gains, so $3000 of your loss is used to offset this year's regular income. If your marginal tax bracket is 22% you save $660 in taxes this year. The loss carries over so you can do that every year until the carryover is exhausted. Now let's say you're 70 years old and still working, but start collecting SS and you still have some carryover remaining. Depending on your tax bracket and how much of your SS is taxable (according to your SS Provisional Income) you could also save on the taxes on your SS.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: What's the big deal on TLH

Post by Florida Orange »

GaryA505, that's right, but you still had to take an $18,000 loss to get the tax savings. There is no net advantage, it just lessens the impact of the loss.
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Re: What's the big deal on TLH

Post by Morik »

Florida Orange wrote: Sat Jul 30, 2022 5:38 pm GaryA505, that's right, but you still had to take an $18,000 loss to get the tax savings. There is no net advantage, it just lessens the impact of the loss.
You can't control the loss. Whether you harvest it or not you still have the loss.
Harvesting it can be financially beneficial, vs not harvesting it.
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Re: What's the big deal on TLH

Post by Florida Orange »

Morik, that's true. If you have already taken the loss you might as well tax loss harvest. But you only have a loss when you decide to sell for a loss. TLH makes the long term financial impact of the loss less bad than it would otherwise be, but you still decided to sell for a loss. You still lost money, you just have the possibility of offsetting some of the loses in the future.
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Re: What's the big deal on TLH

Post by Morik »

Florida Orange wrote: Sat Jul 30, 2022 5:57 pm Morik, that's true. If you have already taken the loss you might as well tax loss harvest. But you only have a loss when you decide to sell for a loss. TLH makes the long term financial impact of the loss less bad than it would otherwise be, but you still decided to sell for a loss. You still lost money, you just have the possibility of offsetting some of the loses in the future.
This is not quite correct.

No harvest:
I bought $100 worth of investment 'A".
The current market value of my investment in 'A' is $50.
Ending state: I hold investments currently worth $50 with a cost basis of $100.
I could sell and have $70 in hand (assuming the loss is worth $20 when offsetting income), or I can let the $50 grow.

Harvest:
I bought $100 worth of investment 'A".
The current market value of my investment in 'A' is $50.
I identify investment 'B' which I find similar enough to 'A' to substitute for it long term (but isn't 'substantially identical' in terms of wash sale rules).
I sell my $50 of 'A' and buy $50 of 'B'.
I can claim a $50 loss against my income right now, or to offset other gains. I invest the proceeds (say $20 if I used the $50 loss to offset income at a 40% total tax rate).
Ending state: I hold investments currently worth $70 with a cost basis of $70.

I can let the $70 grow, or i sell everything and end up with the same $70 in hand.

Let's say I grow for 20 years and the money quadruples in that time.
The no harvest scenario I sell my $50*4=$200 and pay $15 in LTCG on the $100 gain (basis was $100), so end up with $185 (assuming 15% LTCG tax rate).
The harvest scenario I sell my $70*4=$280 and pay $31.50 in LTCG on the $210 gain (basis was $70) and end up with $248.50.
Last edited by Morik on Sat Jul 30, 2022 7:05 pm, edited 1 time in total.
GaryA505
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Re: What's the big deal on TLH

Post by GaryA505 »

Florida Orange wrote: Sat Jul 30, 2022 5:38 pm GaryA505, that's right, but you still had to take an $18,000 loss to get the tax savings. There is no net advantage, it just lessens the impact of the loss.
Correct, but since the loss is already there, why not get something out of it?
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Re: What's the big deal on TLH

Post by Florida Orange »

Where did the $35 come from? Are you saying you had $35 in tax savings? If so, you paid less taxes because you had a loss. You can spend that $35 any way you want, including buying more of investment "B". I don't see how that changes anything.
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Re: What's the big deal on TLH

Post by Florida Orange »

GaryA505, yes, if the loss is already there. But it would have been better not to sell for a loss.
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Re: What's the big deal on TLH

Post by Morik »

Florida Orange wrote: Sat Jul 30, 2022 7:07 pm Where did the $35 come from? Are you saying you had $35 in tax savings? If so, you paid less taxes because you had a loss. You can spend that $35 any way you want, including buying more of investment "B". I don't see how that changes anything.
I edited it to $20 (35 was not realistic). Yes you pay less in taxes because of the loss, but only if you harvest it.
In the no harvest scenario you don't get to claim any loss on your taxes.
This is precisely the whole point of tax loss harvesting.
You get to claim that loss right now, get some money back on taxes and invest that extra money.
If you don't harvest you still get that loss, but only in the future when you end up selling. The overall result is as I posted--you have more total money in the future from harvesting now, vs not harvesting. The situation can change a little if your tax bracket changes in the meantime, of course.
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Re: What's the big deal on TLH

Post by Morik »

Florida Orange wrote: Sat Jul 30, 2022 7:10 pm GaryA505, yes, if the loss is already there. But it would have been better not to sell for a loss.
I think you are missing the fact that tax loss harvesting includes purchasing a replacement investment.
Please explain how in the example I posted it is better to not sell investment A (and thus, not harvest the paper loss) and end up with $185 later instead of selling A (and realizing the loss, but replacing it with similar investment B) and ending up with $248.50 later.
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Re: What's the big deal on TLH

Post by Florida Orange »

Morik, it still seems to me that you sold investment "A" for a $50 loss and used that loss to decrease your taxes by $20, so your after tax loss on investment "A" was $30. You could have used any amount of money to buy shares of investment "B" and if investment "B" quadruples in value you will end up with more because you started with more. You still lost $30 (after taxes) on investment "A". How you choose to invest any money you may have on something else seems to me to be unrelated.
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Re: What's the big deal on TLH

Post by Chip »

Florida Orange wrote: Sun Jul 31, 2022 11:27 am Morik, it still seems to me that you sold investment "A" for a $50 loss and used that loss to decrease your taxes by $20, so your after tax loss on investment "A" was $30. You could have used any amount of money to buy shares of investment "B" and if investment "B" quadruples in value you will end up with more because you started with more. You still lost $30 (after taxes) on investment "A". How you choose to invest any money you may have on something else seems to me to be unrelated.
Since money is fungible and the investment position is effectively unchanged it definitely is related. All that has happened is that an unrealized loss has been converted to realized loss which can be used to offset other income and reduce current taxes.

Have you read the wiki on tax loss harvesting?
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Re: What's the big deal on TLH

Post by Florida Orange »

Yes Chip I have read the wiki. And you're right, money is fungible. Which means Morik could have used the $20 he saved in taxes to buy shares of investment "B" or he could have used it to buy lunch. Or he could have put it in the bank. And he could have used any amount of money from his bank account to buy shares of investment "B" or anything else he wanted. Saving money on taxes is great. Investing money is great. But since money is fungible, investing any amount of money from any source is a separate transaction. He lost money on investment "A" and made the loss less bad by tax loss harvesting. It seems to me that what he does with that money (or any other money he has) is immaterial to that fact. I do see the reason for tax loss harvesting. My point is that it doesn't make you money, it merely decreases the impact of the loss.
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Re: What's the big deal on TLH

Post by international001 »

Still, let's not forget that you can only offset $3k of income over the years. If you have big losses, TLH are useless.
Unlike you are planning to sell some other securities anyway (I am, for instance, since I have some individual stocks I want to get rid off)
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Re: What's the big deal on TLH

Post by Bh1984 »

How does TLH work for business owners? Can you offset k-1 gains?
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Re: What's the big deal on TLH

Post by Morik »

Florida Orange wrote: Sun Jul 31, 2022 5:27 pm Yes Chip I have read the wiki. And you're right, money is fungible. Which means Morik could have used the $20 he saved in taxes to buy shares of investment "B" or he could have used it to buy lunch. Or he could have put it in the bank. And he could have used any amount of money from his bank account to buy shares of investment "B" or anything else he wanted. Saving money on taxes is great. Investing money is great. But since money is fungible, investing any amount of money from any source is a separate transaction. He lost money on investment "A" and made the loss less bad by tax loss harvesting. It seems to me that what he does with that money (or any other money he has) is immaterial to that fact. I do see the reason for tax loss harvesting. My point is that it doesn't make you money, it merely decreases the impact of the loss.
I'm not sure how to explain it other than I already have, but you are not correct by any reasonable definition of 'loss'.

You have $20 you wouldn't otherwise have had. Sure you could pull $20 from somewhere else, but we aren't talking about that.

Tax loss harvesting does not reduce your invested position.

Money is fungible and your invested assets are exchangeable for money. You have already lost the value whether you sell or not.
You seem to be thinking that if you don't sell it, you haven't actually lost anything. This isn't the case.
Now of course if you change your investment position by selling and taking that money out of the portfolio, then you won't have whatever future growth that investment would have had. This is generally what people are talking about when they say you haven't really lost anything if you don't sell--if you sell you 'lock in' the loss and miss out on the [potential] recovery/future growth. (As an aside, this whole thing about not really having lost money is mental gymnastics--money is fungible, the assets are liquid and exchangeable for a certain amount of money. If the assets can be exchanged for less money, you own less total monetary value than you did before.)

But that is not what is happening with TLH. Yes, if you have money around you can put it in and of course a larger investment amount will grow more, but that isn't what we are talking about. We are talking about taking a series of actions that results in a larger investment amount being in the portfolio with no money coming out of your pocket.

I'm going to re-paste my earlier post. Note that no outside money is flowing into the portfolio from your pockets. (Yes, you are putting money in that the government hands you for realizing that loss on A, but this money wasn't available to you without selling A.)

No harvest:
I bought $100 worth of investment 'A".
The current market value of my investment in 'A' is $50.
Ending state: I hold investments currently worth $50 with a cost basis of $100.

Harvest:
I bought $100 worth of investment 'A".
The current market value of my investment in 'A' is $50.
I identify investment 'B' which I find similar enough to 'A' to substitute for it long term (but isn't 'substantially identical' in terms of wash sale rules).
I sell my $50 of 'A' and buy $50 of 'B'.
I can claim a $50 loss against my income right now, or to offset other gains. I invest the proceeds (say $20 if I used the $50 loss to offset income at a 40% total tax rate).
Ending state: I hold investments currently worth $70 with a cost basis of $70.

Let's say I grow for 20 years and the money quadruples in that time.
The no harvest scenario I sell my $50*4=$200 and pay $15 in LTCG on the $100 gain (basis was $100), so end up with $185 (assuming 15% LTCG tax rate).
The harvest scenario I sell my $70*4=$280 and pay $31.50 in LTCG on the $210 gain (basis was $70) and end up with $248.50.


Please explain how I have lost money by doing the 'harvest' scenario instead of the 'no harvest' scenario. In either scenario no outside money is flowing into or out of the portfolio. I have not ponied up additional capital.

If it helps, consider a larger amount of money and someone who has a super precise budget such that every single penny they can afford to invest has already been invested. Let's say their marginal tax rate is 25%. They bought $10k worth of A, which is now worth $7k.

No harvest: They hold onto A. They have $7k investment with $10k cost basis.

Harvest: They sell A, buy similarly-performing investment B for $7k + invest the $750 they get from claiming the $3k loss on A against their income. Now they have a $7.75k investment with cost basis of $7.75k.

Time passes, investments A & B are both worth twice as much now.

No harvest: The $7k grew to $14k. The basis is $10k, they sell and pay LTCG (15%) on $4k gain, which is $600. Ending value: $14000 - $600 = $13400

Harvest: The $7.75k grew to $15.5k. The basis is $7.75k. They sell and pay LTCG (15%) on $7.75k gain, which is $1162.50. Ending value: $15500 - $1162.50 = $14337.5.

This investor has ended up with an extra $937.50 that they wouldn't have otherwise had. They did not lose money by tax loss harvesting--they gained money. This did not require moving any outside cash from their pockets into the portfolio. It is on top of any other money they can afford to put into the portfolio.
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Re: What's the big deal on TLH

Post by lazynovice »

international001 wrote: Sun Jul 31, 2022 6:41 pm Still, let's not forget that you can only offset $3k of income over the years. If you have big losses, TLH are useless.
Unlike you are planning to sell some other securities anyway (I am, for instance, since I have some individual stocks I want to get rid off)
If you ever plan to draw from your taxable account, which most people do, large losses are not useless.
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Re: What's the big deal on TLH

Post by Florida Orange »

Morik, I follow your argument, but here's what I don't understand: When you tax loss harvest, you're using loses from one source to offset income from another source, thus reducing your taxable income, thus reducing your taxes. So you're paying less in taxes because you had less income. When you talk about reinvesting the tax savings, it sounds as if money suddenly appeared in your account. But it didn't. The money was there all along. All you did was not spend it on taxes. I suppose you could take some money out of your account and say "this is the money I didn't pay in taxes" and then invest it or buy lottery tickets with it and maybe it will turn into more money. But it was your money anyway. You have more money to invest because you paid less taxes because you had less taxable income because you used some loses to offset some gains. As far as I can see, tax loss harvesting doesn't create more money. Investing creates more money. Anything you do to decrease your expenses (in this case taxes) will leave you with more money to invest. What am I missing?
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