The theme this week on the Retirement Quick Tips Podcast is: Analyze Your Tax Return Like A CPA.

Today, I’m talking about reviewing tax loss carryforwards, and the wealth of information that can be uncovered in just this one line item. 

Over the last decade, most investment portfolios have had large gains, and it’s less likely that I’ll see a loss carry forward. When you sell an investment in a taxable account at a loss and you don’t have any gains to offset that with or the gains don’t exceed the amount of the loss, you get to carry that loss forward to future years. But with a decade+ of gains now, I don’t see this much any more and when I do, there’s a story behind it that needs to be uncovered to learn more about my client. And you can use this to learn more about your own temperament as well. 

Tax losses can come from selling an investment at a large loss, or maybe a business that went belly up. Sometimes it can indicate a client’s appetite for risk and their tendencies to panic when the market turns south. If you sold your entire stock portfolio when the stock market was in freefall during the early days of Covid in March of 2020, you might still have a significant tax loss carry forward. 

So you can learn a lot about your temperament, investment philosophy, and investing behavior all of which are good indicators of future behavior. When working with clients, this is especially useful if they’re a newer client and I wasn’t around in those years where they had large losses. If I see that a client panicked and sold in the spring of 2020, then I am likely to put them into a more conservative portfolio that has less in stocks and is less likely to experience the gyrations of the market. 

In the gospel of Matthew in the new testament, there is a verse that says “You will know them by their fruits”. In the behavioral finance bible, if such a thing existed, it would say something like: “You will know them by their tax loss carryforward.”

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance