Tax loss harvesting is a term you’ve probably heard but don’t know what it means. It may seem obscure, but it’s a good weapon to have in your investing arsenal. So just what the f**k is tax loss harvesting?

Dan Egan, the Director of Behavioral Finance at Betterment is joining us to talk about Tax Loss Harvesting. We discuss what it is, how it works and what sort of benefits it provides you as a long-term investor.

Taxes Everywhere!

You pay income tax of course, and there are various types of taxes you pay on your investments too.

Capital Gains

A capital gain is the difference between the price you paid for an asset and the higher price you sold it for. The IRS wants a cut off that profit, and they take it in the form of a capital gains tax. There are realized and unrealized capital gains. A gain is not realized until the asset is sold.

The government wants their cut, but they also want you to be a long term investor. If you hold an investment for less than one year, it’s considered a short-term investment, and you will pay a higher tax rate, the same rate that your income is taxed at. Selling investments in the short term are considered a job in a way, and you’ve taxed accordingly.

If you wait more than a year to sell, you will be taxed at a much lower rate, no more than 15%. That’s a substantial difference so be sure you take that into account when you’re deciding whether or not to sell.

Dividends

Dividends are investment income from owning stocks. It’s a share of a corporation’s profits that is paid to investors. You can do two things with those dividends, keep them and pay taxes on them or reinvest them by buying more shares in the company.

Qualified dividends are taxed at the lower capital gains rate. Non-qualified dividends are being taxed at ordinary income tax rates. To be considered qualified, dividends have to meet specific criteria; they have to be issued by American corporations who trade publicly on the big exchanges like NASDAQ or the Dow Jones.

Investors must adhere to specific rules too. They must own the dividend paying stock for no fewer than 60 days out of a 121 day period called the holding period.

Dividends that don’t meet those standards are considered nonqualified.

Depending on your tax bracket, qualified dividends are taxed at 0, 15, or 20%. The dividend income has to be included with your other sources of income to determine your bracket.

Currently, the tax brackets are:

10%: Single filers earning less than $9,275

15%: Single filers earning from $9,275 to $37,650

25%: Single filers earning from $37,650 to $91,150

28%: Single filers earning from $91,150 to $190,150

33%: Single filers earning from $190,150 to $413,350

35%: Single filers earning from $413,350 to $415,050

39.6%: Single filers earning more than $415,050

Those in the 10-15% bracket are taxed at 0%. If you’re in the 25-35% bracket, you will be charged 15%, and if you’re in the above 35% bracket, you’re taxed at 20%.

Non-qualified dividends can be taxed as much as 39.6%, depending on your income bracket.

Medicare Surcharge

The Medicare payroll tax is 2.9%. You pay 1.45% of your earned income which is deducted automatically from your paycheck, and your employer pays 1.45%. For high-income individuals, there is an additional tax called the Medicare surcharge, an additional 0.9% for those earning more than $200,000 per year.

Before 2013, you didn’t have to pay Medicare tax on investment income from things like capital gains and dividends.

Since 2013, however, you could owe a 3.8% Medicare tax on some of or all your net investment income. The amount is based on whichever is lower, the total of your net investments or the amount over $200,000