If Mitt Romney really didn't pay taxes for even one of the 10 years Harry Reid claims he didn't, he likely pulled it off using an insidious-sounding but perfectly legal technique known as "tax-loss harvesting." Now you can do it too (at least those of you whose portfolios are worth a mere six figures, not just a Romney-esque eight or nine).
Wealthfront, the algorithmic money-management service targeted at young tech workers flush from IPOs, is launching an automated tax-loss harvesting service today for clients with at least $100,000 in their accounts. Long thought of as a sophisticated tool concocted by white-shoe accountants for the super rich, tax-loss harvesting is a surprisingly simple way to cut your tax bill.
Say you own shares in two mutual funds. One goes up, and you sell for a profit, which in tax terms is considered a capital gain. Meanwhile, the other fund goes down. So you sell that too.
Wait, what? Isn't the mantra "Buy low, sell high"? Here's the catch: When you sell the tanking mutual fund shares for a loss, you can write that off against the gain you made selling the other shares. At the same time, you can take the remaining proceeds from the shares you sold at a loss, then turn around and reinvest them in a different fund of comparable value. In essence, you've sold shares for a loss but still own the shares. You've "harvested" your loss, but you haven't lost your crop.
Wealthfront says it will take the same software-driven approach to tax-loss harvesting as it does decisions about how to spread its clients' money among different asset classes such as stocks, bonds, and real estate, and how to rebalance the spread as the market changes. The Silicon Valley company says the technique can increase after-tax returns by more than 1 percent per year. Not long ago, the IRS revealed that six of the country's 400 top earners paid no federal income tax, and the evidence points to tax-loss harvesting as they way they did it. With a lot less money than the typical plutocrat, you too now can feel like the 1 percent of the 1 percenters.
