A strategy called “harvesting losses” involves trimming losing securities from a portfolio until $3,000 net capital loss for the year has been generated. The taxpayer can deduct the $3,000 loss against taxable income earned from any other source, such as salary, self-employment activities, interest, dividends, or alimony.
The parents reduced their taxable income by $3,000 by using an investment strategy called harvesting to take $3,000 of tax-free income. Since the parents income was taxed at the 20% tax bracket, the income reduction may decrease their income taxes by $600 ($3,000 x 20%).
If you are in a combined (federal, self-employment, and state) tax bracket of 20%, you could reduce your taxes up to $200 for every $1,000 of income reduction by using an investment strategy called harvesting to take up to $3,000 of tax-free income.