Realize Losses vs Pay More Taxes

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Boogie Oogie
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Realize Losses vs Pay More Taxes

Post by Boogie Oogie » Thu Dec 06, 2018 10:00 am

My investment income will be more than my CPA had estimated earlier this year. He had suggested I pay a total of $22,000 divided into quarterly payments to IRS. Now my CPA thinks my total payment to IRS will be $28,000-$30,000 (instead of the $22,000) and he's suggesting I realize losses of about $30,000 to lower my tax bill. I don't understand the logic. Why would I want to realize a $30,000 loss instead of just paying an extra $6,000-$8,000 to the IRS? Sure, nobody wants to pay more taxes but to take a loss that is more than 3 times bigger than what I would have to send to Uncle Sam doesn't make sense to me. Is there something I'm not understanding?

spammagnet
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Re: Realize Losses vs Pay More Taxes

Post by spammagnet » Thu Dec 06, 2018 11:17 am

Boogie Oogie wrote:
Thu Dec 06, 2018 10:00 am
Why would I want to realize a $30,000 loss instead of just paying an extra $6,000-$8,000 to the IRS?
You can reinvest the realized cash while the market is still at the same level. You end up with a paper loss but still hold essentially the same amount in investments. Avoid a wash sale.

If you sell 100K in mutual funds that cost you 130K, you realize 30K in losses and have 100K in cash. Use the proceeds to buy another similar but sufficiently different mutual fund. You end up owning 100K of mutual fund, which is exactly what you had before you realized the loss.

Bogleheads Wiki: Tax Loss Harvesting

senex
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Re: Realize Losses vs Pay More Taxes

Post by senex » Thu Dec 06, 2018 11:29 am

I had written a similar post to spammagnet but he beat me to it.

The key word is "realize." You have already lost the money. If you bought XYZ for $130k that is now worth $100k, you have already lost $30k. If you don't sell, it is an "unrealized" 30k. If you do sell, it is a realized $30k. In both cases you have $100k worth of stuff at the end of the day.

megabad
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Re: Realize Losses vs Pay More Taxes

Post by megabad » Thu Dec 06, 2018 12:56 pm

This is a complicated question with a complicated answer. The above responses are correct in that a paper loss does not necessarily have any significant affect on your portfolio (if you instantly reinvest). What matters is when you actually spend the money. If your accountant is a good one, he/she may be trying to avoid you reaching a higher tax bracket, he may be trying to avoid an underpayment penalty, or he may be trying to get enough losses to deduct from a high income year. These are only speculations though.

ivk5
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Re: Realize Losses vs Pay More Taxes

Post by ivk5 » Thu Dec 06, 2018 2:15 pm

megabad wrote:
Thu Dec 06, 2018 12:56 pm
or he may be trying to get enough losses to deduct from a high income year
Probably not this, since OP will only be able to deduct $3K of capital losses against earned income.

My guess is OP's investment income includes significant capital gains (from sales and/or CG distributions). Accountant may be suggesting TLH to avoid tax on the gains.

But with almost no info, a guess is all it is.

mhalley
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Re: Realize Losses vs Pay More Taxes

Post by mhalley » Thu Dec 06, 2018 3:21 pm

You don't really lose anything when you realize your losses, because you move the money to a similar investment. You are not taking the losses and putting it in a mm fund, you are reinvesting it in an asset that is expected to have similar returns to the current investment. In addition, the capital losses carry over forever. You should welcome the chance to pay less taxes, its the 'Merican Way!

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Earl Lemongrab
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Re: Realize Losses vs Pay More Taxes

Post by Earl Lemongrab » Thu Dec 06, 2018 4:28 pm

ivk5 wrote:
Thu Dec 06, 2018 2:15 pm
My guess is OP's investment income includes significant capital gains (from sales and/or CG distributions). Accountant may be suggesting TLH to avoid tax on the gains.

But with almost no info, a guess is all it is.
Right, some clarification on the overall situation would be helpful.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

bberris
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Re: Realize Losses vs Pay More Taxes

Post by bberris » Thu Dec 06, 2018 4:57 pm

Boogie Oogie wrote:
Thu Dec 06, 2018 10:00 am
.. the logic. Why would I want to realize a $30,000 loss instead of just paying an extra $6,000-$8,000 to the IRS? Sure, nobody wants to pay more taxes but to take a loss that is more than 3 times bigger than what I would have to send to Uncle Sam doesn't make sense to me. Is there something I'm not understanding?
This is what you don't understand: Paying 6,000 tax does not make the 30,000 loss go away. Taking the loss makes the tax go away.

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