By Ada Cartright, CPA/PFS, Tax Director
As we get closer to year-end, tax conversations naturally move to the top of the list. This is the time to take control of what your tax picture will look like in April. For many clients, it starts with reviewing income, expenses and investment activity. Whether this has been a high-income year or one with unusual gains, now is the time to make adjustments before the calendar turns.
One of the most common strategies in these reviews is tax-loss harvesting. This means selling an investment at a loss in order to offset a taxable gain from another investment.¹ If you sold an investment earlier in the year for a gain and also hold a position that is down, you can sell the losing investment and use that loss to cancel out the gain.¹ When the numbers line up, this can reduce or eliminate the tax owed on that gain. If you were already planning to exit the position, harvesting the loss can be a smart way to put it to work.
Still, this strategy is not one-size-fits-all. A common mistake is assuming that any loss can be used to lower taxes. In reality, capital losses only offset capital gains. If your losses are greater than your gains, you can use up to $3,000 to offset ordinary income.¹ The rest carries forward to future years. That means harvesting is most useful when you also have gains to offset in the current year.
Equally as important is how it fits into your overall investment plan. Selling a position just to create a tax benefit may not be the right move if it doesn’t align with your long-term goals. On the other hand, if the position no longer makes sense and there is a loss available, harvesting can be both tax-efficient and a smart way to realign your portfolio.² The goal is not to let tax outcomes dictate your investment decisions, but to make sure they are working in tandem.
Tax-loss harvesting also works best when paired with other planning strategies. If you are already planning to make charitable gifts this year, donating appreciated stock instead of cash can help you avoid gains while still taking the deduction.³ For higher income years, using a donor-advised fund can allow you to capture the deduction now and spread out the giving over time.⁴ If you are over the age of 70 and a half, making a charitable gift of up to $108,000 directly from your Individual Retirement Account (IRA) can satisfy your required minimum distribution and avoid the taxable income that would otherwise result.⁴
It is also a good time to make sure you have taken advantage of retirement savings opportunities. If you are between 60 and 63, the new $11,250 super catch-up for 401(k) contributions is available, and for those over 50, the standard $7,500 catch-up is still an option.⁵ Contributions to a Health Savings Account (HSA) can offer additional tax benefits, and Flexible Spending Account (FSA) balances should be used before year-end if your plan has a use-it-or-lose-it rule.⁵ Each of these steps is small on its own but can add up to a more efficient tax outcome.
The most important step is to act before the year ends. Once the new year begins, many of these moves are no longer available. Talking to your advisor now gives you time to weigh your options and take action. If you want to explore these ideas or just want a second look at your portfolio before year-end, reach out to your Exencial Wealth advisor.
Sources:
- Investopedia (3/7/25) - Tax-Loss Harvesting: Definition and Example
- Investopedia (9/3/24) - The Art of Selling a Losing Position
- IRS (5/30/25) - Charitable contributions deductions
- Investopedia (8/23/25) - Understanding Donor-Advised Funds: Definition, Pros & Cons, and Examples
- IRS (7/25/25) - 401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000
Disclaimer: The information provided in this article is for educational purposes only and should not be considered as financial, tax or legal advice. Please consult with your financial, tax, and legal advisors to determine plans for your individual circumstances.
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