You’ve probably heard the popular phrase, “when life gives you lemons, make lemonade.”
It means to take a negative situation and turn it into a positive one. In the case of a down market, turn paper losses (lemons) and net them against capital gains to keep more money in your pocket (lemonade).
Join PKF Mueller President, Jeffrey A. Delheimer, CPA, and Wealth Advisor, Sal DiTusa, MBA, CEPA, as they discuss Tax-Loss Harvesting, a strategy to help turn portfolio losses into tax breaks.
For more information, visit www.pkfmueller.com or contact one of our qualified advisors:
Jeffrey A. Delheimer, CPA
+1 312 346 2347
Sal DiTusa, MBA, CEPA
+1 847 717 8302
[00:00:00] Emily: Hi everyone. You’re listening to the PKF Mueller podcast, “Business Owner’s Guide: Tips, Trends, and Talks from a CPA.” I’m Emily, and today we welcome PKF Mueller, President Jeffrey A. Delheimer, CPA, and Wealth Advisor, Sal DiTusa, MBA and Certified Exit Planning Advisor.
[00:00:23] Emily: Together, they’ll discuss tax-loss harvesting. But before we begin, let’s do a quick introduction of our guests.
[00:00:35] Emily: Jeff has 25 years of experience in the areas of assurance, corporate governance, accounting, tax, audit, and business consulting. He takes a very client centric approach when advising individuals or owners of closely held businesses, ranging in size from startups to large private companies.
[00:00:52] Emily: Sal joined the Firm’s Wealth Management division as a Wealth Advisor in April of 2019, and brings 13 years of experience in the financial services industry. His key competencies include portfolio review and analysis, asset allocation recommendations, trust and estate planning, and business and personal financial planning.
[00:01:12] Emily: Jeff and Sal, thanks so much for joining today’s podcast.
[00:01:17] Jeff: Emily, thanks for having Sal and myself.
[00:01:19] Sal: Thanks for having us!
[00:01:21] Emily: We’re happy to have you. Let’s dive into the topic.
[00:01:25] Emily: September was a tough month for stocks. And even a few months ago, the end of June, 2022, marked the worst six months of the year since 1970 for the S&P 500, which for good reason caused many investors to panic a little bit. But even in a down market, a tax strategy known as tax-loss harvesting may help turn portfolio losses into tax breaks.
[00:01:48] Emily: So Jeff, start things off by first explaining what tax-loss harvesting is and a little bit about how it works.
[00:01:55] Jeff: Tax-loss harvesting is an interesting way for our financial planners to go in and take losses off of, off of a portfolio that we can actually use when, when preparing their tax returns to net against capital gains that they may have sitting out there. Because the benefit of this is, is allowing us to keep more money in the client’s pocket. And what I mean by that is, yes, we have the gains that we recognize, but now we can net these losses against them, so they actually keep that full amount of the cash in their pocket.
[00:02:30] Emily: And where are these capital gains coming from?
[00:02:33] Jeff: Real Estate’s another big one, when you’re, when you reclaiming the depreciation, that you’ve taken in, in previous years and it’s, and it’s anything, it’s really appreciated property.
[00:02:44] Sal: Yeah, exactly. I guess to expand on that a little bit, what I like to tell clients is, hey, it’s the process of taking paper losses in your portfolio and translating them into accounting losses that we can use to put you in a better tax position going forward and offset future gains.
[00:02:59] Sal: So, I think that’s something that a client kind of grasps onto and understand, hey, I’m getting gains into the portfolio. Well, hey, we’ll build up some losses here while the market’s down for you to help offset those future gains.
[00:03:10] Sal: And I guess to expand on, on the kind of how it works, you know, on my end, you know, I work hand in glove with Jeff, and Jeff will come to me and say, hey, we’ve got a client who maybe sold a business or sold a piece of property and has a large gain that we’re gonna have to realize on the tax side. What do you have in the portfolio that we could take a look at to potentially realize some losses to offset that gain, and that could go to the portfolio and see what makes sense for the client to sell and, and realize that loss.
[00:03:38] Sal: But it’s important when you sell that you’re not coming out of the market. So, the kind of how it works is if we have a, a security that we wanna sell to realize a loss, well, we’re gonna look for a in-kind type of replacement for that, so the client’s not out of the, out of the market. So for example, we might sell a large cap growth mutual fund, that’s at a loss, and then go in and buy a large cap growth ETF.
[00:04:02] Sal: So, we’re going to sell one, right? Realize the loss, but then at the same time, plug in a, a similar investment so the client stays invested and, you know, can participate in any market rebound and anything like that. So, I think that’s important to, to, you know, realize the loss, but also stay in the market at the same time.
[00:04:20] Sal: You’ll see some people might sell a security and then stay out of the market for 31 days to avoid that Wash Sale Rule. But, then the client’s out of the market that whole time. And so the way we do it, we prefer to keep the client actually invested in the market while we’re realizing the loss.
[00:04:35] Jeff: And then when we are able to take those tax-losses, that Sal was able to generate, and then we can net it against, as Sal you mentioned earlier, maybe they sold their business, maybe they sold a building, something else that has a gain that we would actually have to pay taxes on. And then we can net this together which in essence, we keep that cash in the client’s pocket.
[00:04:57] Emily: Sal, you mentioned the Wash Sale Rule. Can you explain that further?
[00:05:02] Sal: Yeah, the Wash Sale Rule, you know, what the government and IRS wants to pay attention to is that you’re not, you know, using short-term trading to realize losses, to offset gains. So, as a way to combat that, they’ve got the Wash Sale Rule, which simply states that, you know, once you sell a security, you can’t buy it back for the next 31 days, or else you’ll lose that, the privilege of realizing that loss.
[00:05:25] Sal: So, as long as you sell it, wait 31 days to buy it back, then you can realize the loss on taxes. If not, you’re gonna get, you know, on your 1099, it’s going to say that you’re not allowed to use this loss because you violate the Wash Sale Rule.
[00:05:37] Sal: So, you definitely wanna be mindful of that. And that’s where, you know, going into an equal or kind security at the time of the transaction makes sense, and you don’t have to worry about, am I, you know, out 30 days? Has it been 32 days? Can I buy it back yet? So, we, we, we prefer to keep them invested and then by doing that, there is no violation of the Wash Sale Rule.
[00:05:59] Emily: What are you seeing right now, considering today’s market, when it comes to gains and losses?
[00:06:05] Sal: Certainly we’re, we’re, we’re advising clients to take some losses while we can.
[00:06:09] Sal: You know, one thing that is kind of unique to our, to the investment world is depending on what a type of investment vehicle you’re in, could drive capital gains at the end of the year. So, what I mean by that is if you’re invested in open-ended mutual funds, which you know, there’s trillions and trillions of dollars invested in mutual funds, you’re in a co-mingled investment vehicle.
[00:06:31] Sal: So, I’m in the mutual fund with Jeff and Emily we’re and with thousands of other investors, and because of that, we all share in the same taxes within that portfolio. So, what you could see in a year, like this year, right, we’ve had a pretty significant downturn in the market, and you’ve seen people wanting to sell their equity positions, so they don’t suffer significant losses.
[00:06:53] Sal: Well, what that’s doing is they’re sending in a sell ticket at the portfolio managers, you know, by law have to generate the cash at the end of each day to give back to the client. So, the portfolio manager’s going in and he has to sell securities to give back the client their money. Well, you know, some of these portfolio managers have been holding shares for 5, 10, 15 years.
[00:07:13] Sal: Maybe he’s had Apple in his portfolio for 10 years and now with the massive redemptions, he’s going in and has to sell Apple shares from a long time ago, say 10 years ago. While those Apple shares are still significantly appreciated, although Apple’s down whatever it is, 30% year to date, he’s up several hundred percent on that position.
[00:07:33] Sal: And so, now you’ve got a client. Lots of clients are fleeing the market, and so the portfolio manager’s selling and still realizing a big gain. And as we said, we all share in that gain if we’re in the mutual fund. So, at the end of the year, you’re gonna get a 1099 reporting, a pretty substantial gain that you have to pay. And oh, by the way, the fund’s down 30%. So, you’ve lost a substantial amount of capital and you’ve been hit with the capital gain in the portfolio.
[00:07:58] Sal: So, by doing some of this tax-loss harvesting, we can help kind of mitigate that at the end of the year. This is something that happened in like 2008, 2009, where clients suffered big losses, but still had big capital gains that they had to pay in the portfolio. Through this process, we can help mitigate that.
[00:08:14] Emily: You both touched on this earlier, but can you talk about how you find some of these opportunities when you’re going through financial statements or tax returns?
[00:08:23] Jeff: Which is a great question, Emily, because that’s where Sal and I working together, hand in hand are able to, I’ll see, hey, we’ve got a gain sitting here that we’re gonna have to pay taxes on, come the following April 15th, and I can go into Sal and say, Hey Sal, this is a mutual client of ours. What are we looking at for potential tax-loss harvesting, once again, to mitigate that gain that we’re gonna report from this other transaction.
[00:08:52] Emily: As mentioned, you and Sal work hand in hand. Without being too specific. Can you share any success stories?
[00:08:59] Jeff: Yeah. Sal and I had a mutual client, that had a transaction, that put off a lot of capital gains and through Sal and I’s discussion, continuously talking, understanding the situation that this mutual client is in, and then, and then the unfortunate circumstances of the downturn in the market during 2022, we were able to say, hey, Sal was to say, Hey, we’ve got a chance here for some tax-loss, tax-losses that we can take advantage of. And then he and I continued our discussion around this and said, hey, we can actually work this to the benefit of the client.
[00:09:38] Jeff: Sal and I had a mutual phone call with this client. They were able to come on board and agree with this, and then we were able to take these tax-losses on paper as Sal explained earlier, and then net them against a real gain, so that way ultimately the client’s able to keep a little bit more money in their pocket at the end of the year.
[00:09:59] Sal: Yeah, absolutely. Absolutely. And you know, in a specific example, we were thinking of a client had, I think about a three, three and a half million dollar tax liability. We were able to go and realize about a half million dollars in losses and, you know, take that off their gain. So, we just put a couple hundred grand back in the client’s pocket for them. That, you know, was earmarked for the government. Well, we put it back in the client’s pocket.
[00:10:22] Emily: Extra pocket money sounds good to me.
[00:10:25] Emily: Before wrapping things up, any final thoughts or key takeaways you’d like to mention?
[00:10:31] Sal: I would just say that, you know, it’s a way. I kind of talk to clients. It’s, you know, kind of making lemonade out of lemons. Yeah, the market’s down and no one likes to have the market down and, and looking at that impairment to capital and their portfolio. But, through you know, good wealth management, good tax advice, working hand in hand with your accountant and your wealth advisor really, really provides the best outcome for the client.
[00:10:57] Sal: I mean, what we look at is, you know, typically a well managed tax portfolio can add 2 to 3% average annualized per year to a client if done properly. And, that’s what we really work on here at Mueller, is it has to be a cohesive effort between the accountant and the wealth advisor, to really bring this to fruition and show the true value to the client, and that’s what Mueller is all about.
[00:11:21] Jeff: Yeah, Sal, I’ll second that. And that’s the nice thing about when we work together, it’s not where we have to necessarily schedule a time on somebody’s calendar to talk about a mutual client. It’s literally, Sal walks down the hall to where I’m sitting and vice versa.
[00:11:36] Jeff: I did that to Sal last week where I said, hey, I’m talking to client X, you know, how’s things going? Kind of give me an update. And we were able to do that in about five minutes, just by me walking into his office and, and starting the conversation, which is why, as you mentioned, with the Mueller principles and what we try to strive to do with our clients.
[00:11:58] Emily: If any of our listeners have any more questions or would like to learn more, can you please share how they might be able to contact you? Jeff, I’ll start with you.
[00:12:08] Jeff: Emily, thank you. They can reach me at, my direct line is +1 312 346 2347, or my email address is jdelheimer, email@example.com.
[00:12:27] Sal: And, for myself, my direct line here at the office, it’s +1 847 717 8302, and then the email is S as in Sal, and then my last name DiTusa, firstname.lastname@example.org. So, email@example.com.
[00:12:45] Emily: Again, thank you so much for joining me on today’s podcast and sharing your knowledge.
[00:12:50] Sal: You’re welcome. Thanks, Emily.
[00:12:51] Jeff: Thank you.
[00:12:52] Emily: And thank you to our listeners. Don’t forget to visit us at pkfmueller.com to learn more about all of our firm services.
[00:12:59] Emily: You can also follow us on social media for more updates, insights, and upcoming events.
[00:13:05] Emily: For matters such as tax-loss harvesting, we always recommend that you reach out to your tax advisor or qualified tax professional.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. No strategy assures success or protects against loss. PKF Mueller and Mueller Financial Services, Inc. Are separate unaffiliated entities. Sal DiTusa is a registered representative with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through IHT WEALTH MANAGEMENT LLC, a registered investment advisor and separate entity from LPL Financial.