Generated over $60k of TLH, live in NJ, NJ does not allow tax loss carry over, should I create some tax gains now ?

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sharukh
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Generated over $60k of TLH, live in NJ, NJ does not allow tax loss carry over, should I create some tax gains now ?

Post by sharukh »

Hi,

My portfolio is a simple VTI + VXUS. I have used ITOT and IXUS during TLH, but now just VTI and VXUS.
when the market was down this year, due to inkling to do something I did TLH.

I have around $40k short term loss and $20k long term loss.

NJ doesn't allow tax loss to be carry forwarded to future years. So any tax loss now will become a gain in future for which I have to pay taxes even though i didn't get any tax break.
Also NJ doesn't allow to deduct any Short term loss against W2 wage income like federal.

My current Tax brackets 32% Federal and 6.37% in NJ

No intent to move out of NJ in foreseeable future.
Should I just sell some VTI and buy it again to create some tax gains to offset too much losses ?

Thank you
Last edited by sharukh on Wed Nov 23, 2022 12:14 pm, edited 2 times in total.
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retired@50
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Re: Generated over $60k of TLH, live in NJ, NJ does not allow tax loss carry over, should I create some tax gains now ?

Post by retired@50 »

climber2020 wrote: Wed Nov 23, 2022 12:03 pm What about federal taxes?
No kidding.

A $3,000 offset to Federal income taxes at the 32% rate is worth $960 per year. See IRS Form 1040 - Line 7.

Regards,
This is one person's opinion. Nothing more.
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sharukh
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Re: Generated over $60k of TLH, live in NJ, NJ does not allow tax loss carry over, should I create some tax gains now ?

Post by sharukh »

retired@50 wrote: Wed Nov 23, 2022 12:10 pm
climber2020 wrote: Wed Nov 23, 2022 12:03 pm What about federal taxes?
No kidding.

A $3,000 offset to Federal income taxes at the 32% rate is worth $960 per year. See IRS Form 1040 - Line 7.

Regards,
I have around $40k short term loss and $20k long term loss.
So shall I generate $20k long term gain by year end and hold on to short term loss to carry forward only in federal ?
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Re: Generated over $60k of TLH, live in NJ, NJ does not allow tax loss carry over, should I create some tax gains now ?

Post by retired@50 »

sharukh wrote: Wed Nov 23, 2022 12:13 pm
retired@50 wrote: Wed Nov 23, 2022 12:10 pm
climber2020 wrote: Wed Nov 23, 2022 12:03 pm What about federal taxes?
No kidding.

A $3,000 offset to Federal income taxes at the 32% rate is worth $960 per year. See IRS Form 1040 - Line 7.

Regards,
I have around $40k short term loss and $20k long term loss.
So shall I generate $20k long term gain by year end and hold on to short term loss to carry forward only in federal ?
Personally speaking, I wouldn't generate any capital gains on purpose unless I needed the money for spending. I wouldn't let NJ play such a large role in my tax planning, since your NJ taxes are only about 1/5th of what you pay to the Federal government.

Regards,
This is one person's opinion. Nothing more.
pmorgan2020
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Re: Generated over $60k of TLH, live in NJ, NJ does not allow tax loss carry over, should I create some tax gains now ?

Post by pmorgan2020 »

sharukh wrote: Wed Nov 23, 2022 11:57 am Hi,

My portfolio is a simple VTI + VXUS. I have used ITOT and IXUS during TLH, but now just VTI and VXUS.
when the market was down this year, due to inkling to do something I did TLH.

I have around $40k short term loss and $20k long term loss.

NJ doesn't allow tax loss to be carry forwarded to future years. So any tax loss now will become a gain in future for which I have to pay taxes even though i didn't get any tax break.
Also NJ doesn't allow to deduct any Short term loss against W2 wage income like federal.

My current Tax brackets 32% Federal and 6.37% in NJ

No intent to move out of NJ in foreseeable future.
Should I just sell some VTI and buy it again to create some tax gains to offset too much losses ?

Thank you

I have a similar situation here in NJ and was thinking to relocate to another state (because I have an option to due to my work) at least briefly to get around this tax issue.Not too sure if this is a bad idea , need to talk to my CPA.
lakpr
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Re: Generated over $60k of TLH, live in NJ, NJ does not allow tax loss carry over, should I create some tax gains now ?

Post by lakpr »

Fellow NJ resident here, and I differ from others on this point. I really don't see any reason not to realize some capital gains, to offset those losses. Especially short term gains, if you have any, that would be taxed as ordinary income anyway in both Federal and state taxes. If all such short term gains are exhausted, then sell those lots with the largest gains to reset the cost basis, keep just $3000 in net losses to be subtracted from income on both Federal and State { Edit: Federal only, see below } for the current year.

This is a form of tax-gain harvesting, which Bogleheads encourage to do people who are in the 12% bracket do anyway. The only difference is that for NJ residents, this would be forced at all levels of tax brackets. Unless you are certain to relocate out of NJ within the next 20 years ($60k losses divided by $3k loss carryover per year), just offset your losses less $3000 carry over by gains.
Last edited by lakpr on Wed Nov 23, 2022 1:30 pm, edited 1 time in total.
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sharukh
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Re: Generated over $60k of TLH, live in NJ, NJ does not allow tax loss carry over, should I create some tax gains now ?

Post by sharukh »

lakpr wrote: Wed Nov 23, 2022 12:54 pm Keep just $3000 in net losses to be subtracted from income on both Federal and State for the current year.

NJ doesn't allow to deduct $3k capital loss on W2 wages. Or does it?
lakpr
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Re: Generated over $60k of TLH, live in NJ, NJ does not allow tax loss carry over, should I create some tax gains now ?

Post by lakpr »

sharukh wrote: Wed Nov 23, 2022 1:25 pm
lakpr wrote: Wed Nov 23, 2022 12:54 pm Keep just $3000 in net losses to be subtracted from income on both Federal and State for the current year.
NJ doesn't allow to deduct $3k capital loss on W2 wages. Or does it?
You are right, my mistake. You cannot deduct $3k capital loss against W2 wages, only against capital gains, and that too incurred in the same calendar year. Edited my previous post.

[ I blame it on not having enough coffee ]

But I would still leave a net of $3k loss to adjust against Federal W2 wages, even if you aren't able to deduct that net loss against NJ W2 wages.
Last edited by lakpr on Thu Nov 24, 2022 2:12 pm, edited 2 times in total.
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Re: Generated over $60k of TLH, live in NJ, NJ does not allow tax loss carry over, should I create some tax gains now ?

Post by grabiner »

If you realize a capital gain this year just to use the loss in NJ, you save 21.37% tax on that gain, 15% federal and 6,37% NJ. But neither of these is an immediate savings; you save 21.37% of what the gain would have been when you sold years in the future.

If the capital loss offsets a capital gain in a later year, you save only 15%, unless you move to a state which does allow carryovers.

If the capital loss offsets ordinary income in a later year, you save 32%.

So it makes sense to realize a gain to offset the loss only if you expect the loss to offset some future gains which you will realize in NJ (or in a no-tax state if you retire there).
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lakpr
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Re: Generated over $60k of TLH, live in NJ, NJ does not allow tax loss carry over, should I create some tax gains now ?

Post by lakpr »

grabiner wrote: Thu Nov 24, 2022 1:31 pm If you realize a capital gain this year just to use the loss in NJ, you save 21.37% tax on that gain, 15% federal and 6,37% NJ. But neither of these is an immediate savings; you save 21.37% of what the gain would have been when you sold years in the future.
But the poster is in 32% Federal tax bracket, so the capital gains rate applicable is 23.8% (20% + 3.8% NIIT). With state tax rate of 6.625%, the cumulative tax rate savings is 30.425%. This is immediate savings.

Compared to a future tax savings even if the poster moves to a no tax state in the future, it would be 22% or 24% (if moving during retirement) or 32% (if there is an option of moving to a different state yet keep same income). Not to mention, time value of money, all those future income offsets would be worth less than that if we calculate the net present value.

Better to realize those capital gains now, no?

Edited to add: even for folks in the 22% or 24% tax bracket same conclusion applies. The immediate tax savings rate would be 15% + 6.625% against 22%, or 18.8% + 6.625% against 24%. Only for folks who expect to be in a no tax state AND stay within the 12% tax bracket would the equation change in favor of carrying losses over the years, but then they have the risk of using up those losses against capital gains at 0% if they sell any investment in the future for a gain. Federal law won't let you choose to apply losses only against ordinary income (sorry for stating the obvious)
Last edited by lakpr on Thu Nov 24, 2022 2:09 pm, edited 1 time in total.
Marseille07
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Re: Generated over $60k of TLH, live in NJ, NJ does not allow tax loss carry over, should I create some tax gains now ?

Post by Marseille07 »

sharukh wrote: Wed Nov 23, 2022 12:13 pm I have around $40k short term loss and $20k long term loss.
So shall I generate $20k long term gain by year end and hold on to short term loss to carry forward only in federal ?
Yes, if you have gains to harvest now then I think that's a good idea. Some capital losses are beneficial but not too much losses.
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Topic Author
sharukh
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Re: Generated over $60k of TLH, live in NJ, NJ does not allow tax loss carry over, should I create some tax gains now ?

Post by sharukh »

Sharing an update:
Previous:
I had around $40k short term loss and $20k long term loss.

Now:
I realized Tax gain harvested $20k long term gains. So no more long term gains
Dont have much short term gains to harvest, so the short terms loss is still intact at $40k. I will be carrying this over to future years.
I fully expect to realize these gains in the future while in NJ. so this NJ-non-carry-forwardable loss is going to cost me extra $2500 in NJ taxes in future years when I sell, which I see Federal tax deductions make up for it in few years.

Thank you everyone for giving feedback.
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