When is TLH worth it?

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vchiu25
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When is TLH worth it?

Post by vchiu25 »

I still have 100k of book loss from 2020. Im 40, so I will probably never be able to use it all in deducting regular income. (3k/year) I also don’t plan on selling anything for capital gain for the next 10 years

Do I still bother with TLH or is the point moot now?
Last edited by vchiu25 on Fri May 13, 2022 8:26 pm, edited 1 time in total.
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vchiu25
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Re: When is TLH worth it?

Post by vchiu25 »

Found a similar post
viewtopic.php?t=377573
Silk McCue
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Re: When is TLH worth it?

Post by Silk McCue »

I certainly would. As you can see in the other thread there may come a time when a large capital gains transaction can be offset in whole or in part.

Cheers
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anon_investor
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Re: When is TLH worth it?

Post by anon_investor »

Silk McCue wrote: Fri May 13, 2022 8:28 pm I certainly would. As you can see in the other thread there may come a time when a large capital gains transaction can be offset in whole or in part.

Cheers
TLH can be very helpful to exit unwanted pre-BH investments with less of a tax hit.
SnowBog
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Re: When is TLH worth it?

Post by SnowBog »

The question ultimately comes down to current versus expected future tax rate. (Much like Roth conversions.)

For myself, I'm likely in my highest income/highest taxed years. Ideally, we'll be retired early - and into much lower tax brackets. So for us, TLH is a "no brainer". We offset our higher taxes now by getting to claim the loss. Any unused loss is carried over until used up, offsetting income again in higher taxed years. When we eventually need to sell, since we'll be in a lower tax bracket, we should owe less taxes (even after accounting for the lower cost basis).

But if your future taxes are the same - it's arguably a wash... The gains you get now will essentially be lost latter.

And if your future tax rates are higher - you could potentially lose money by doing TLH...
bling
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Re: When is TLH worth it?

Post by bling »

most people focus on the 3k deduction and being able to offset gains at unexpected times.

for me, i like the fact that TLH turns all the red into green. it's a lot easier mentally to look at your portfolio and stay the course when you're up 1% vs down 20%, despite both having the same portfolio value.
Sgal8713
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Re: When is TLH worth it?

Post by Sgal8713 »

bling wrote: Fri May 13, 2022 11:16 pm most people focus on the 3k deduction and being able to offset gains at unexpected times.

for me, i like the fact that TLH turns all the red into green. it's a lot easier mentally to look at your portfolio and stay the course when you're up 1% vs down 20%, despite both having the same portfolio value.
+1. I must kill the red. Of course it is all mental, but that's ok with me. That there is additional secondary gain is nice.
marcopolo
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Re: When is TLH worth it?

Post by marcopolo »

SnowBog wrote: Fri May 13, 2022 11:02 pm The question ultimately comes down to current versus expected future tax rate. (Much like Roth conversions.)

For myself, I'm likely in my highest income/highest taxed years. Ideally, we'll be retired early - and into much lower tax brackets. So for us, TLH is a "no brainer". We offset our higher taxes now by getting to claim the loss. Any unused loss is carried over until used up, offsetting income again in higher taxed years. When we eventually need to sell, since we'll be in a lower tax bracket, we should owe less taxes (even after accounting for the lower cost basis).

But if your future taxes are the same - it's arguably a wash... The gains you get now will essentially be lost latter.

And if your future tax rates are higher - you could potentially lose money by doing TLH...
I think this is spot on.

I have done quite a bit of TLH in the past when we were in higher tax bracket and still accumulating. So, we are kind of conditioned to do that. We now have some losses on Bond funds that I thought about harvesting (almost a knee-jerk reaction), but the realized it is more likely to cost us money.

We are in early retirement, in the 12% tax bracket (0% LTCG rate), and withdrawing from portfolio to fund expenses. Any losses we harvest will simply offset gains from that would have been taxed at 0% anyway. It will then lower the basis of those holdings, which will create a larger potential future tax liability
Once in a while you get shown the light, in the strangest of places if you look at it right.
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samsoes
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Re: When is TLH worth it?

Post by samsoes »

A large TLH would have come in handy for those folks who experienced an outrageous capital gain distribution from certain Vanguard target date funds late last year.
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scamper
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Re: When is TLH worth it?

Post by scamper »

Recently discovered that TLH is useful to lower MAGI for ACA subsidy, Medicare IRMAA, and Social Security calculations.
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climber2020
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Re: When is TLH worth it?

Post by climber2020 »

Is there any benefit to having a big pile of carryover losses for a retiree with low expenses who is in the 0% capital gains tax bracket?

In that situation, aren't you using up those carryover losses each year that would have been taxed at 0% anyway?
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Re: When is TLH worth it?

Post by jebmke »

climber2020 wrote: Sat May 14, 2022 8:09 am Is there any benefit to having a big pile of carryover losses for a retiree with low expenses who is in the 0% capital gains tax bracket?

In that situation, aren't you using up those carryover losses each year that would have been taxed at 0% anyway?
probably not, unless they have a surprise later (e.g. sell a house with a gain in excess of exclusion). On the other hand, there may not be any downside and doing the transactions are not complicated and normally no cost if using funds/ETFs.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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House Blend
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Re: When is TLH worth it?

Post by House Blend »

SnowBog wrote: Fri May 13, 2022 11:02 pm The question ultimately comes down to current versus expected future tax rate. (Much like Roth conversions.)
However, for a tax loss harvester, predicting future capital gains tax costs can be exceptionally difficult, one reason being that if you have a large bank of carryover losses, you may need to project the rates at which these carryover losses will be "spent".

Consider the typical over-saving Boglehead. (You know the type -- "I can't retire with a withdrawal rate over 2%!!!!").

For them, their taxable accounts will still be large when they kick the bucket. There's no reason to assume that the shares bought after harvesting losses 10+ years ago will be sold during their lifetime. Much more likely they will be buying new shares with their too-large RMDs.

Their heirs will get the stepped-up basis, and the cap gains tax rates they worried about are immaterial.

------------------------------------------------------------

There is potential for having carryover losses that are "too medium". That is, you can end up in a situation where fewer harvested losses, or (a lot) more harvested losses, would both be better. For this to happen, it is necessary to run out of carryover losses during your lifetime at some point. Good luck predicting if or when that will happen.

On the other hand, once you pass well beyond the "too medium" point, it is impossible to have too many. The worst that can happen is that you never pay capital gains taxes for the rest of your life (and your heirs get the stepped up basis).
Last edited by House Blend on Sat May 14, 2022 8:50 am, edited 1 time in total.
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dodecahedron
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Re: When is TLH worth it?

Post by dodecahedron »

climber2020 wrote: Sat May 14, 2022 8:09 am Is there any benefit to having a big pile of carryover losses for a retiree with low expenses who is in the 0% capital gains tax bracket?

In that situation, aren't you using up those carryover losses each year that would have been taxed at 0% anyway?
For me, mostly retired (very small part-time job) with low expenses and just barely in 0% capital gains tax bracket, I am doing Roth conversions while trying to keep taxable income just under the point where my qualified dividends/LTCG stay in 0% tax range, because compounded Tax Torpedo Capital Gains Bump Zone effects (due to my SS surviving spouse benefits interacting with div/LTCG tax zones) could quickly push me into 49% effective MTR (over 50% including state taxes), so $3K in carryover losses allows me to Roth convert an extra $3K while still staying (just barely under) that tax precipice.

It is a complicated juggling/balancing act at the end of each year, with many factors to consider as I make end of year donations of appreciated securities to my DAF (I am still itemizing until I am old enough for QCDs) and Roth conversions.

My part-time job enables me to make an IRA contribution, which I put off until just before filing taxes to enable me to fine-tune MAGI (defined differently for different purposes) and taxable income (key to staying in 0% for my qualified dividends) by directing it towards tIRA, Roth, or a convex combination thereof.

So yes, I am grateful each year for the $3K of additional "wiggle room" that my accumulated TLH gives me for Roth conversions or contributions.

But others may find themselves situated differently. This Kitces article discusses a variety of scenarios.
Last edited by dodecahedron on Sat May 14, 2022 8:56 am, edited 1 time in total.
carolinaman
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Re: When is TLH worth it?

Post by carolinaman »

You do not have to TLH all of it at once. You could sell enough to get tax deduction for a number of years. I did this in 2020, sold Vangd Total Market (VTI) and bought S&P500 (VOO), so I was not out of the market. It was not a big deal, but did help with taxes.
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grabiner
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Re: When is TLH worth it?

Post by grabiner »

You may often find a need to sell for a capital gain, and then having large losses will be useful.

I harvested a huge loss in 2008-2009. In 2013, I decided to buy a home. My taxable account is all stock, and I sold at a market peak, so I had a significant gain when I sold enough stock for the down payment; carryover losses offset this. (And if I had decided to pay cash for the home instead, I would have had a much larger gain, using up all my carryovers; that would not have been worthwhile.)

However, when you have huge carryover losses, harvesting small losses might not be worth it, particularly if there are transaction costs. I normally wait for at least a 10% loss before harvesting losses in an ETF, because the benefit isn't that great.
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spottedtiles
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Re: When is TLH worth it?

Post by spottedtiles »

grabiner wrote: Tue May 17, 2022 10:22 pm You may often find a need to sell for a capital gain, and then having large losses will be useful.

I harvested a huge loss in 2008-2009. In 2013, I decided to buy a home. My taxable account is all stock, and I sold at a market peak, so I had a significant gain when I sold enough stock for the down payment; carryover losses offset this. (And if I had decided to pay cash for the home instead, I would have had a much larger gain, using up all my carryovers; that would not have been worthwhile.)

However, when you have huge carryover losses, harvesting small losses might not be worth it, particularly if there are transaction costs. I normally wait for at least a 10% loss before harvesting losses in an ETF, because the benefit isn't that great.
Great insight.
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