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Financial Planning > Tax Planning > Tax Loss Harvesting

5 Steps to Take Now on Year-End Tax Harvesting

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Tax time occurs at least twice each year. One date is the tax filing deadline and the other is December 31. Because most stock mutual funds distribute their capital gains in December, now is a perfect time to address the issue. In this post, we will discuss steps you should consider as the capital gains distribution date approaches.

I received an email from a mutual fund wholesaler recently with a list of the expected capital gains for their funds. I happen to own a couple of them and found the information quite useful. For example, one of the funds expects the distribution to equal about 5% to 10% of the fund’s NAV. Should I sell or should I continue to hold the fund? Here is a brief list of some questions to consider:

  • Do I still like the fund?
  • Do clients have a gain or a loss in the fund?
  • If I did sell, what would I use as a replacement?

If you own a stock mutual fund, you might consider replacing it with a stock ETF. Why? Even though it is not a guarantee, because of its structural difference, a stock ETF will generally not distribute capital gains to its shareholders. (See my prior ThinkAdvisor article on this topic, Under the Hood: Tax Treatment of ETFs vs. Mutual Funds.) 

If you plan to engage in some tax harvesting, here are a few steps, which may help to streamline the process:

  1. Print out a list of every mutual fund you hold across all client accounts
  2. Group those that contain stocks
  3. Group the stock mutual funds by fund family
  4. Call each fund family (or email your wholesaler) and get a list of expected capital gains distributions for their funds
  5. If the expected distribution is large, and your opinion of the fund has changed, consider replacing it.

Helping clients reduce their tax liability will help to create a stronger bond between you and your client and they will see that you are looking out for their best interest. After all, that is what we do, correct?

Until next time, thanks for reading and have a great week!