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Tax Loss Harvesting and Wash Sale Rules for 2021 and 2022: Increase Deductions and Tax Credits - YouTube
Channel: WCS Money Tutorials
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Welcome to WCS Money Tutorials.
Today鈥檚 topic is Tax Loss Harvesting聽聽
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and the Wash Sale Rules. How to save money聽
on taxes by realizing investment losses.
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Tax loss harvesting in taxable accounts is聽
used to reduce taxes. For securities deemed聽聽
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unlikely to yield a profit or to yield less聽
of a profit than other potential investments,聽聽
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or if you simply want to reallocate assets,聽
you can sell unprofitable securities,聽聽
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especially at the end of the year, to realize a聽
capital loss, which can be used to offset taxable聽聽
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capital gains or up to $3000 of ordinary聽
income, including income earned from work.
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However, tax loss harvesting does not聽
work in tax-advantaged retirement accounts聽聽
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because taxes are only paid when money聽
is withdrawn from tax-deferred accounts.聽聽
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For Roth accounts, there is no tax,聽
so there is nothing to offset.
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Besides lowering taxes, there are several benefits聽
to tax loss harvesting. Security proceeds can be聽聽
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diverted to better investment opportunities.
Taxes can be saved by decreasing capital gains聽聽
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or up to $3000 of ordinary income, and by聽
possibly increasing certain tax credits.
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Unused losses can be carried聽
forward indefinitely.
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The eligibility and amount of most tax credits聽
depends directly on modified adjusted gross聽聽
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income, or MAGI, which is simply AGI with聽
some deductions or tax credits added back. The聽聽
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exact definition of MAGI depends on the tax code聽
providing the credit, but the definition of MAGI聽聽
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for any of these credits does not include adding聽
back investment losses, so tax loss harvesting聽聽
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will only reduce MAGI, not increase it.
Most tax credits have AGI limits with聽聽
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phaseout ranges. This is a simplified聽
schematic to illustrate this general idea.
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In regard to income, these tax credits are聽
maximized when income is below the phaseout range,聽聽
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eliminated entirely above聽
the phaseout range, and
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increase with decreasing AGI from the end聽
of the phaseout range to the beginning.
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A lower AGI may make you聽
eligible for these tax credits.
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The earned income tax credit may be worth聽
thousands of dollars if you have children.聽聽
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You must have income earned from work to qualify.聽
However, investment income may lower the credit,聽聽
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and, if it exceeds $10,000 in 2021, then聽
you will not qualify for the credit at all.聽聽
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Bringing investment income to less than聽
$10,000 may entitle you to the credit.
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The earned income tax credit聽
has these AGI limits. Note the聽聽
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investment income limit for 2021 and 2022.
The child tax credit also has AGI limits, but聽聽
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they are rather high: $400,000 for married couples聽
filing jointly and $200,000 for everyone else.
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These are the AGI limits for聽
the educational tax credits.
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The adoption credit also聽
has rather high AGI limits.
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There is no AGI limit for the dependent care聽
credit, but the credit amount does increase聽聽
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From 20% for those making more than $43,000聽
to 35% for those making $15,000 or less.
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For the 2021 tax year only, the聽
size of the child or dependent care聽聽
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expense credit is increased and聽
made fully refundable. The related聽聽
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qualifying expenses in which the credit聽
is based increases from $3000 for one聽聽
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qualifying dependent or $6000 for 2 or more聽
dependents to $8000 and $16,000, respectively.
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The AGI limits for the saver鈥檚 credit,聽
which can be worth up to $1,000,聽聽
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determines the credit percentage, which can be聽
10%, 20%, or 50%, and varies with filing status.
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Tax loss harvesting may not work if you have only聽
long-term capital gains or qualified dividends to聽聽
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offset and you are in the 0% capital gains tax聽
bracket. Here, you can see long-term capital聽聽
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gains tax brackets for 2021 and 2022. The dollar聽
amounts are the lower limits for each bracket聽聽
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for each filing status or for estates and trusts.聽
The top bracket of 20% has no upper limit.
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Note that these brackets apply after deducting the聽
standard deduction or itemized deductions plus any聽聽
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20% qualified business income deduction.聽
So, for instance, a married couple filing聽聽
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jointly earning more than $100,000 could still聽
qualify for the 0% capital gains tax rate.
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However, even if you are in the 0% capital gains聽
tax bracket, you can still potentially save聽聽
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thousands of dollars in taxes if you qualify聽
for some of the credits already discussed.
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Wash sale rules exist because investors could聽
defer or lower their taxes by selling their聽聽
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securities that happen to be down at the聽
moment, then immediately repurchasing them聽聽
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to claim a loss for the tax year. However,聽
if the securities are repurchased within聽聽
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the wash sale period, then the losses will be聽
disallowed. The securities can be repurchased聽聽
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outside of the wash sale period, but that聽
introduces significant reinvestment risk.
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A wash sale occurs when you sell securities to聽
claim a loss, but then you or a closely related聽聽
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party buys substantially identical securities聽
within the wash sale period. The wash sale聽聽
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period is 61 days long, from 30 days before聽
the date of the sale to 30 days afterward.
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The wash sale rule disallows the claiming of聽
losses for securities in a wash sale. Instead,聽聽
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the repurchased securities have the same basis as聽
the sold securities and the holding period starts聽聽
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when the original securities were purchased.
Substantially identical securities include the聽聽
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same securities or any securities convertible聽
into the sold securities, such as call options,聽聽
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warrants, or preferred stocks or bonds that聽
are convertible into the sold security.
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Closely related parties include the聽
spouse, siblings, parents, grandparents,聽聽
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and other relatives and also closely held聽
corporations where the taxpayer is a major owner.
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Wash sale rules do not apply to retirement聽
accounts, cryptocurrencies, or capital gains,聽聽
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nor to traders with professional trader status聽
or to dealers trading as part of their business.
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Since wash sale rules do not apply to capital聽
gains, you may want to sell some securities聽聽
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if you expect higher tax rates in聽
the future. You can then immediately聽聽
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repurchase the securities for more profits聽
in the future, but with a higher tax basis,聽聽
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which will be more likely to聽
lower future taxable gains.
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I am now going to show you some wash聽
sale examples for different types of聽聽
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transactions. I will briefly mention the type of聽
transaction, but I will not explain it in detail,聽聽
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since many people will not be interested in these聽
details. If you are interested in the details,聽聽
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simply freeze the screen and read the example.
This is a simple wash sale example.
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This example shows how the wash聽
sale rules apply to short sales.
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This example shows how a wash sale is treated聽
if you repurchase the securities through your聽聽
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traditional IRA. As a practical matter, this聽
treatment does not apply to Roth accounts,聽聽
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since the gains are not taxed anyway.
If substantially identical property is聽聽
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bought during the wash sale period, then only聽
the amount of loss realized on the same number聽聽
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of repurchased shares is disallowed.聽
The remaining loss is deductible.
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If you bought blocks of securities at聽
different times and at different prices聽聽
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and sell them on the same day and in which the聽
wash sale rules apply to at least some of the聽聽
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securities, then any losses on the sale day cannot聽
be used to offset the gains on that same day.
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Thank you very much for your time. If you liked my聽
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