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Navigate the Complexities of Tax-Loss Harvesting: A Dental Entrepreneur's Guide

Summary:

As a dental practice owner, managing your investment portfolio is as crucial as managing your practice. Tax-loss harvesting is a strategy many dental entrepreneurs and their advisors use to reduce their tax burden. While this well-established tool has proven valuable for many dental professionals, debate continues about its long-term effectiveness in enhancing investment returns and reducing taxes. With various implementation methods available, some may be more beneficial than others for dental practice owners.

As a dental practice owner, managing your investment portfolio is as crucial as managing your practice. Tax-loss harvesting is a strategy many dental entrepreneurs and their advisors use to reduce their tax burden. While this well-established tool has proven valuable for many dental professionals, debate continues about its long-term effectiveness in enhancing investment returns and reducing taxes. With various implementation methods available, some may be more beneficial than others for dental practice owners.

​Let's examine this tax mitigation strategy that has become increasingly relevant for dental entrepreneurs managing both practice and personal investments.

A Versatile Strategy for Dental Professionals

Tax mitigation is a significant concern for dental practice owners, who often face substantial tax burdens from both practice income and investments. This concern is widespread – according to a 2024 University of Chicago Harris/AP-NORC nationwide poll of 1,024 adults, approximately two-thirds of people (67%) consider their federal income tax to be too high.

For dental entrepreneurs who often have significant investment portfolios alongside their practices, tax-loss harvesting can be particularly valuable. The strategy involves intentionally realizing losses in your taxable investment account by selling securities (such as stocks, mutual funds, or ETFs) that have decreased in value below your purchase price. These realized capital losses can offset capital gains from other investments – whether from profitable sales or capital gains distributions from mutual funds.

Consider this scenario: You've had a successful year in your dental practice and have also sold some appreciated investments. Tax-loss harvesting could help offset those gains. Furthermore, if your realized capital losses exceed your capital gains for the year, you can use up to $3,000 of those losses to offset your practice's ordinary taxable income.

Even better, any unused losses don't expire. If your realized losses exceed both your capital gains and the $3,000 income limit for the current year, you can carry these losses forward – providing tax benefits in future years when your practice or investments generate substantial gains.

​While results vary based on individual circumstances and timing, research from MIT and Chapman University suggests that tax-loss harvesting could potentially enhance a large-cap stock portfolio's returns by up to 1.1% annually.

SMART TAX-LOSS HARVESTING FOR DENTAL ENTREPRENEURS

As a dental practice owner, you need to consider several key factors and risks before implementing a tax-loss harvesting strategy:

  • Missing out on rapid gains. During market downturns, it might seem logical to harvest losses, especially when managing both practice and investment risks. However, markets can rebound quickly and powerfully. Selling investments purely for tax purposes could mean missing out on significant recoveries. Remember, as explained below, you can't immediately repurchase the same securities if you want to claim the tax benefits.
  • Replacing the assets you sell. After selling an investment at a loss to offset taxable gains, you'll need to consider replacement strategies. While it might be tempting to buy a very similar investment, you'll need to navigate the wash sale rule. This IRS regulation prohibits claiming a tax loss if you purchase the same or a substantially similar security within 30 days before or after the sale. This rule applies across all your accounts – including your practice's retirement accounts and personal investment accounts. However, you can potentially replace the sold security with one that is sufficiently different to satisfy IRS requirements while maintaining your desired investment exposure.
  • Overdoing it. As a dental entrepreneur already managing the complexities of practice finances, it's important not to let tax-loss harvesting become overly complicated. Transaction costs from frequent buying and selling can eat into your tax savings. A measured approach, coordinated with your overall financial strategy, typically works best.

Only Part of the Equation​

While tax-loss harvesting can be valuable for dental practice owners with taxable investment accounts, it should be one component of a broader tax strategy. Other approaches to consider include:

  • Converting traditional IRA or 401(k) assets to Roth accounts
  • Utilizing tax-exempt or tax-managed investments
  • Implementing charitable giving strategies that benefit both your community and your tax situation
  • Maximizing practice-related retirement plan contributions


The upshot:
For dental entrepreneurs, tax-loss harvesting should be part of a comprehensive financial strategy that considers both practice and personal investments. Work with qualified advisors who understand both dental practice finances and investment management to determine if tax-loss harvesting fits into your overall plan for preserving wealth.


Disclosure: Tax laws are subject to change, which may affect how any given strategy may perform. Always consult with a tax advisor.

Tim McNeely
Advisor to Dental Entrepueriers 

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This material is intended to be used for educational purposes and does not constitute a solicitation to purchase a security or investment advisory services. Some material on this site has been researched and prepared by BSW Inner Circle and its affiliates, CEG Worldwide, LLC and AES Nation, LLC. Timothy J McNeely has retained AES Nation to conduct research and prepare informational materials for his use. Mr. McNeely is a member of CEG Roundtable and pays an annual fee for these services. Mr. McNeely is involved in these activities through The LifeStone Companies.

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