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Timing Crucial for Successful Client Tax Loss Harvesting

By Paul Hechinger December 31, 2015

‘Tis the season for tax loss harvesting. Now is the time for year-end decisions about whether and how to offset any capital gains from investments with losses from securities sales.

Still, while timing is crucial for successful tax loss harvesting, and there are often necessary year-end steps to take, planning for tax loss harvesting should happen all year long, say advisors and tax specialists.

“There are very few strategies that we talk about at year’s end that we couldn’t be talking about all year, but you get peoples’ attention at the end of the year,” says Suzanne Shier, chief tax strategist/tax counsel for wealth management at Northern Trust.

It makes sense for advisors to check with accountants after April when the previous year’s tax return is filed to see if there’s a large loss carryover to begin with, says Shier. “There might not be a need to harvest losses currently if you have large loss carryovers from prior years to offset gains,” she says, explaining that large loss carryovers offer baseline information that can inform thinking through the year, supplemented by updated monitoring later on.

“That’s where the year-end piece comes into play,” Shier says, since clients will then have a firmer sense of what their market gains are likely to be – and gains have to be paid for in that year and, unlike losses, cannot be rolled over.

Tax-loss harvesting is not for everyone, says Shier. First, a client has to have enough taxable gains – and be in a high enough tax bracket – for the effort to make sense.

Suzanne Shier

“It also requires a degree of active engagement on the part of the advisor and the client,” she says.

Properly planning tax loss harvesting becomes considerably more complex if clients have more than one advisor. One advisor could sell a particular security or specific fund at a loss, and another advisor could buy the same security or fund a week later. “You just ran afoul of the wash sale rule for that client,” says Shier.

Having multiple advisors also makes it more difficult to rebalance and implement investment strategies when clients are substituting securities for those they sold at a loss for tax purposes.

Multiple advisor situations make it all the more important that communications between clients, advisors and accountants are clear at all times, not just at the end of the year or at tax time.

“If the client is quarterbacking for multiple investment advisors,” says Shier, “the advisor should be confirming with the client that they are coordinating this with others.”

Keeping accountants and tax advisors in the loop throughout the year is especially helpful, says CPA Jeffrey Mutnik, director of taxation and financial services at Berkowitz Pollack Brant in southeastern Florida.

“If an asset has little to no hope of appreciation, perhaps it should be sold early in the year to limit the potential for further depreciation,” he says. “Losses do not have to be harvested only in December to be useful. Early losses can offset early gains, late gains and perhaps even gains in future years.”

Analyzing potential wash sales during the year can reduce surprises to clients at the end of the year, says Mutnik. Monitoring throughout the year can also make it easier for accountants to most efficiently match up short and long term transactions.

Waiting until the end of the year can also have a purely practical problem, Mutnik points out: “As you get closer to year’s end, people tend to take vacations and they aren’t always available when you need them – earlier is always better.”

Financial advisor and CPA Gina Chironis says her firm did most of this year’s tax harvesting over a very short period in September for the obvious reason – the market shake-up.

“That’s when the market gave us lemons and we made our lemonade,” says Chironis, CEO of Irvine, Calif.-based Clarity Wealth Management, with an AUM of roughly $60 million.

Chironis says her approach is not based on a schedule but on the market.

“My system is set up so that we see if an asset class has moved significantly – 5% or $5,000 is generally my rule of thumb – then we’ll consider harvesting a loss,” says Chironis, also on the American Institute of CPAs’ personal financial planning executive committee.

Still, Chironis adds that she generally tries to avoid tax loss harvesting at the end of the year. “I would argue that this is a terrible time of year to tax loss harvest, probably the least favorable time, because you’ve got year-end dividend distributions in many mutual funds,” she says. Investors who owned taxable shares at certain dates earlier in the year are entitled to the dividend and required to pay tax on it, even if they never received it. “That’s something to be aware of that very few advisors even know about,” she says.