We hope you had a wonderful Thanksgiving holiday! As you make those big Black Friday purchases, keep in mind you only have 37 days left to save on your taxes. Few are aware of how to save on your ordinary income taxes using investment losses, potentially leaving up to $1,050 on the table. That’s a new iPhone📱worth of savings!
🧠 What you need to know
Scenario:
- Say you earn a $100,000 salary. This is referred to as ordinary income. Assuming a 20% tax rate, you would expect to pay $20,000 in taxes. Note: We’ve used simple assumptions. You can find actual 2023 tax brackets here.
- Let’s also say you are sitting on gains of $10,000 on Nvidia and $15,000 of losses on Intel. (Sorry if this hits too close to home 😏).
Deduct $3,000 of net losses:
What are net losses? Let’s say in 2023 you sold your Nvidia stock and realized a profit of $10,000 and sold the Intel stock and realized a loss of $15,000. Your net loss in this situation is $5,000. The IRS allows you to deduct $3,000 of net losses against your ordinary income.
Saving on taxes:
- You could deduct $3,000 of the net loss against your $100,000 of ordinary income.
- You would now pay tax on $97,000.
- Instead of $20,000 your tax bill would look more like $19,400 at the 20% rate. That’s $600 in tax savings from using your losses!
- If you earn more and are in a higher bracket, your savings would be higher.
Remember, though, in a given year, you cannot deduct more than $3,000. In this example, you took a net loss of $5,000. What happens with the other $2,000? You can carry any loss forward to 2024 and use it against your ordinary income. Assuming your ordinary income stays constant at $100,000, you would pay tax on $98,000 instead after deducting the $2,000 loss carry forward.
🚶🏾 Follow these steps
- Evaluate your trades: Know your realized gains, realized losses, and the net of these.
- Evaluate your current portfolio: Know your unrealized gains and unrealized losses.
- Have a net realized gain? First, see if you have an opportunity to offset it by selling positions with unrealized losses.
- Maximize your deduction. After offsetting the gain, determine if you want to sell positions to take more losses in order to maximize your $3,000 deduction.
- Repurchase stocks you sold for a loss. You can repurchase them in 31 days to still receive the tax benefit and avoid violating IRS rules.
🤝 Mezzi makes this simple
Those steps can take a lot of time. Mezzi automatically reviews your trades and portfolio. Using our sophisticated tax algorithm, Mezzi provides a personalized estimate of your taxes and potential savings. Mezzi’s guide helps with:
- Income deductions: Maximize the $3,000 deduction.
- Capital gains taxes: Determine how to offset gains to reduce it.
- Stock suggestions: Suggestions on which stocks to sell.
- Repurchase reminders: Avoid the IRS wash sale violation.
- Replacement suggestions: AI-powered suggestions for alternative stocks to maintain your industry exposure during the wash sale period.
- Loss carry forwards: Calculation of loss carry forwards so you know what you can use next year
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