IV. Tax-Loss Harvesting: Slash Taxable Income Like a Pro
Retirement Income: Market downturn? Turn losses into tax savings. Tax-loss harvesting (TLH) lets you sell underperforming investments to offset capital gains—or even ordinary income—legally. The IRS lets you reduce your yearly income by up to $3,000. You should be aware of this strategy. For more information, check IRS Publication 550. Here is how to leverage it in 2025.
Retirement Income: How Tax-Loss Harvesting Works (Step-by-Step)
TLH converts portfolio losses into tax deductions. Example: You sell Stock X at a $10,000 loss and Stock Y at a $7,000 gain. The $10,000 loss offsets the $7,000 gain, leaving $3,000 to deduct from ordinary income. Remaining losses? Carry them forward indefinitely.
3. Key Rules to Avoid IRS Trouble
- Wash-sale rule: No repurchasing “substantially identical” assets within 30 days (e.g., swapping VTI for ITOT is allowed; VTI for VTI is not).
- Account types: Only taxable accounts qualify (IRAs/401(k)s do not).
- Short-term vs. long-term: Prioritize offsetting short-term gains (taxed higher).
2025 Updates You Cannot Ignore
The Foreign Earned Income Exclusion rose to $130,000, expanding TLH opportunities for expats. The IRS also tightened wash-sale enforcement—track “similar” investments carefully.
Read this Topic no. 409 to know more about Capital gains, losses and the harvesting process
Next: Retirement Income: Smart Strategies 5
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