Carryover Losses and Tax Gain Harvesting

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Mathcop
Posts: 29
Joined: Wed Dec 02, 2009 7:29 pm
Location: Maryland

Carryover Losses and Tax Gain Harvesting

Post by Mathcop » Fri May 19, 2017 1:04 pm

After decades of non-Boglehead investing, my in-laws have finally come around to a standard 3-fund portfolio. Current balances are approximately $250,000 in taxable and $250,000 in traditional IRAs. They are mid-70s and thus are taking RMDs. Those plus SS and pension have them firmly in the 25% federal tax bracket. They currently have no unrealized gains or losses in the taxable account.

Their years of investing adventures have left them with approximately $400,000 in carryover losses, $250,000 short term and $150,000 long term.

Are there any pros or cons to using up the carryover losses by tax gain harvesting in their taxable account at the end of every year?

They are aware of the stepped-up basis that will result upon their deaths under current tax law. One pro that I see to tax gain harvesting is to mitigate the possibility that either the stepped-up basis or carryover rules might be changed or eliminated in the future.

One con might be that the $3000 cap for offsetting ordinary income with carryover losses might be raised in the future, although I understand it has been that amount since 1978.

Any other suggestions for using these losses? I've searched previous threads but not found much. Thanks - Mathcop
Just remember that the last laugh is on you ... and always look on the bright side of life! - Eric Idle

MP123
Posts: 136
Joined: Thu Feb 16, 2017 3:32 pm

Re: Carryover Losses and Tax Gain Harvesting

Post by MP123 » Fri May 19, 2017 1:52 pm

$400k in carryover losses? Ouch.

Hard to say what the future holds for tax legislation but they could certainly use it today to offset their capital gains (if any) which would reduce their taxes and thus increase the estate size potentially.

I would imagine that in their mid-70s the value of the $3,000/yr. deduction from ordinary income might not be a major factor. It would take a loooong time to use up that $400k unless they have some gains to apply it towards. Of course that's sort of like the tail wagging the dog depending on where the gains are.

TheGipper
Posts: 263
Joined: Fri Jun 26, 2015 9:52 am

Re: Carryover Losses and Tax Gain Harvesting

Post by TheGipper » Fri May 19, 2017 2:48 pm

I would encourage them to do Roth conversions, paid for as much as possible with lots with future gains from the taxable account, as the carryover losses will offset them.

User avatar
House Blend
Posts: 4225
Joined: Fri May 04, 2007 1:02 pm

Re: Carryover Losses and Tax Gain Harvesting

Post by House Blend » Fri May 19, 2017 8:05 pm

Mathcop wrote:They are aware of the stepped-up basis that will result upon their deaths under current tax law. One pro that I see to tax gain harvesting is to mitigate the possibility that either the stepped-up basis or carryover rules might be changed or eliminated in the future.
That looks like pretty weak tea to me.

No need to "use" the losses. Enjoy taking the $3000 deduction every year, and be confident that they'll never need to pay cap gains tax unless a tragedy strikes and their taxable account increases by 160%. And they get spendy.

BTW, gain harvesting sounds very hypothetical at this point. You said that they currently have no gains to realize.

User avatar
Artsdoctor
Posts: 2880
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Carryover Losses and Tax Gain Harvesting

Post by Artsdoctor » Fri May 19, 2017 9:03 pm

Do they live in an area where real estate is high? If they've lived in their house for decades, do they have significant capital gains? If so, they can use those losses to offset capital gains from the sale of their house if they want to downsize, for example. ($500,000 in gains would not be taxed for them, but anything over would be.)

Post Reply