Year-End Money Moves That Could Cut Your Tax Bill
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What is the main topic discussed in this episode?
Here's your money briefing for Wednesday, December 20th. I'm J.R. Whelan for The Wall Street Journal. This year's market rally minimized stock losses that many individual investors might have used to lower their tax bill. Instead, those tax savings might come about as a result of lost value in bonds.
Because the Fed started raising interest rates in 2022 and it was just very steady and lots of bond funds lost money.
How can selling losing investments reduce your 2024 tax bill?
So people still have net losses on their bonds. So if you're looking to harvest losses to offset gains, that's the place to look.
We'll talk to Wall Street Journal columnist Laura Saunders after the break.
Losses in your portfolio can help lower your tax bill when you file your return, but 2023's market rally makes that process a little more tricky. Wall Street Journal columnist Laura Saunders joins me. So Laura, if someone has taken a loss on an investment this year, how can that reduce their tax bill when they file their taxes in 2024?
This is one of the nice things about the tax code. If you have losses and you sell the loser and you have gains and you sell the profitable investment, then you can match the losses against the gains and reduce your taxable income. And if you have no gains that you have taken, then you can use the losses to shelter $3,000 of ordinary income like wages or interest or something like that.
And if it's more than $3,000, can you spread it out?
The good news is they don't expire. You can use $3,000 against your ordinary income and then roll the others forward for use later on. So the tax code is pretty generous that way.
Oh, wow. That can really add up for people.
Yes, it makes a big difference. And very wealthy people who live mostly on investments are very careful about harvesting their gains and losses and things like that.
Why are bond losses more relevant than stock losses for tax-loss harvesting in 2023?
In past years, I've gone through my portfolio and I've sold shares of stocks that have lost value. But what is it about 2023 that changes up that equation for many people?
we were fortunate enough to have a lot of gains this year. The market lost a lot in 2022, and it's made a lot of that back this year. So people have gains. Now, what they may not realize is that they may still have a lot more losses in their bond portfolio. And I should say, by the way, that all of these assets have to be kept in taxable accounts. The techniques we're talking about don't really work if you've got everything in IRAs or retirement accounts.
So any losses among stocks or bonds in your 401k or IRA, that's off limits.
Off the table. That's exactly right.
So the big headline from the stock market rally has been stocks have done very well, but actually bonds have come up on the short end of the stick?
Yes, because the Fed started raising interest rates in 2022 and it was just very steady and lots of bonds lost money and lots of bond funds lost money.
What is the December 31 deadline rule for realizing losses to offset 2023 gains?
And those losses have come back a little bit, but not nearly as much. So people still have net losses on their bonds. So if you're looking to harvest losses to offset gains, that's the place to look this year.
What's the deadline to sell stocks or bonds to take a loss and put it against your 2023 taxes?
The deadline is December 31st. There's another important thing to know is that losses can't be carried back. So what if you take your gains this year and what if you don't take your losses until January 2nd or 3rd? Those losses cannot be carried back to shelter 2023 income. They can be carried forward, but there's a sort of a hard and fast stop at December 31st.
Speaking of taxes, let's talk about other ways that people can save even more on their tax bill. Deciding whether to take the standard deduction or itemize their deductions could really change the math.
Ever since the 2017 tax overhaul, the standard deduction has been quite high. For a couple this year, it's close to $30,000. The actual amount is $27,700. And this is the amount of money that you can just subtract from your income to save taxes. The other thing you can do is itemize deductions. On Schedule A, this is where you take your mortgage interest and your charitable contributions.
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:02–0:30
2
How can selling losing investments reduce your 2024 tax bill?
0:30–2:12
3
Why are bond losses more relevant than stock losses for tax-loss harvesting in 2023?
2:12–3:14
4
What is the December 31 deadline rule for realizing losses to offset 2023 gains?
3:14–6:24
5
How do capital-loss carryforwards and the $3,000 ordinary-income offset work?
6:24–6:46
Speakers
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