Russia’s attack on Ukraine is only the latest and largest of world events to rattle markets and economies. Wealthy clients are also jittery—especially this time of year—about money and taxes. Are there any direct tax implications of current world events? Capital gains, perhaps, tied to investments sold in a panic?
“For us, it’s the opposite,” said Bruce Primeau, a CPA and president at Summit Wealth Advocates in Prior Lake, Minn. “We are not selling equity positions, as they’ve declined in value. Instead, we’re rebalancing client accounts.
“This process forces you to sell high and buy low and creates potential tax-deductible losses that clients can use to reduce taxable income for 2022,” he said.
The war in Ukraine only joins such other recent unsettling factors as inflation and the Covid pandemic. “From early November, the Dow Jones has been a roller coaster,” said Robert Conzo, CEO at The Wealth Alliance in Melville, N.Y. “This has caused concerns, as well as opportunities, for investors.”
The big tax news at 2021’s end—Biden’s Build Back Better Plan proposal—has been tabled and ultimately eclipsed by the Ukrainian conflict. “What remains are certain tax strategies that have been utilized for many years,” Conzo said. “One main opportunity has been creating tax losses during this volatile period. Last year was difficult for investors to harvest tax losses due to a multiyear upward trend in the U.S. equity market. The sharp downturn in the late fourth quarter provided a moment for investors to create much-needed offsets.”
“If you did sell non-retirement account investments and have a capital gain, you may want to see if you now have any unrealized losses in the investment you didn’t sell,” said Joe Scutellaro, CPA, managing director of CohnReznick Wealth Management and Tax Practice leader in the firm’s Holmdel, N.J., office. “Remember, if things change and you want to buy back any particular stocks you sold, you need to wait 30 days to avoid the wash-sale rules, which could reverse out the tax loss.
“Also note if your capital losses exceed your gains, you can only deduct $3,000 of net capital losses each year against your other taxable income in that year,” he added. “Any excess capital losses will then carry forward.”
Tax-planning tools can be found in sectors now doing well, such as master limited partnerships that benefited from spikes in oil prices. “MLPs can also provide added benefits from a tax perspective because many can classify part of their income as return of capital,” Conzo said.
Since the equity markets are lower, making backdoor Roth IRA contributions now or Roth IRA contributions in general make sense, Primeau said.
“When portfolios are down, it does provide an opportunity to make Roth IRA conversions for a lower tax cost,” said Robert S. Seltzer, a CPA at Seltzer Business Management in Los Angeles. “This decision will allow clients to take advantage of lower taxes without trying to time the market or lock in losses on their underlying investments.