3. Harvest Investment Losses to Manage Volatility and Tax Liability
Year end is an opportunity to rebalance clients’ portfolios and sell losing investments that no longer fit their strategy. Even when markets are rising, volatility may create winners and losers within a portfolio. Tax-loss harvesting can offset investment gains, lowering the tax liability for clients—especially those in higher tax brackets.
But pay close attention to the IRS “wash-sale rule.” This ruling restricts you from selling assets to harvest a loss, with the intention of buying them back right away, solely for the purpose of paying less in taxes. However, you can reinvest in similar assets within tax-deferred vehicles such as IRAs, 401(k)s or IOVAs. Clients will have an opportunity to participate in future upside potential when these assets bounce back, while reducing their current tax bill. The benefit can be meaningful, especially for tax-inefficient assets and tactical strategies.
4. “Bunch” Itemized Deductions for Greater Impact
Last year’s reforms significantly altered how investors can take deductions to limit their year-end tax bill, by raising the standard deduction, but eliminating a number of itemized deductions. In many cases, the most effective strategy will be to “bunch” certain deductions, such as medical expenses or charitable contributions, into a single year where possible for greater impact. This strategy will allow their itemized deductions in certain years to exceed the higher standard deductions—$12,200 for individual taxpayers and $24,400 for married couples filing jointly.
Asset location, managing mutual fund distributions, harvesting losses, and thinking critically about the right way to itemize deductions work together as part of a holistic financial plan to help you manage how much your clients will owe in taxes. Take advantage of these four steps to put your clients in a stronger position for the 2019 tax season and give them a great start in 2020. The sooner you focus on tax planning, the sooner your clients can benefit.
Craig Hawley is head of Nationwide’s annuity distribution.