Wealthy clients should always have taxes in mind when the economy and stock market suffer a downturn. The question is how to plan—and how much to let tax concerns influence investment decisions.

A recent survey of business executives’ outlook on the global economy, for instance, showed declining optimism over the past year amid concerns about trade conflict and other business impacts. According to the first-quarter survey from the American Institute of CPAs, a little more than a third of accounting U.S. business leaders are optimistic about prospects for the global economy over the next 12 months, compared with 71 percent a year ago.

Easing the minds of worried clients depends on advisors’ approach to managing assets. J. Womack, managing director of investment solutions at Independent Advisor Solutions by SEI in Oaks, Pa., said a recent survey by his firm also found that more than three-quarters of advisors expected a market downturn in the next two years.

“If their advisors are implementing a holistic, goals-based approach, we tell them not to worry,” he said. “If their advisors aren’t utilizing a goals-based strategy, they should talk to their advisors and understand their rationale.”

“Some [wealthy] folks do believe that the economy is going to go south and the equity markets with it,” added Bruce Primeau, a CPA and president of Summit Wealth Advocates in Prior Lake, Minn. “We recommend our retired clients have 12 to 18 months of liquid assets so that they don’t have to draw large amounts of cash from their portfolio when the equity markets are down. The reason those funds are on the sidelines is to provide some defense against an inevitable equity market pullback.”

“Harvest tax losses when Wall Street is suffering,” said Kathleen Keylor, CPA and director at MAI Capital Management in Cleveland. “The taxpayer sells stock at a loss and then immediately reinvests in another stock or stocks. This generates a tax loss, but the taxpayer is still invested in the market and hasn’t actually lost any value."

Another option is to wait at least 30 days and reinvest in the same stock, she said.

"This makes sense especially if the stock is expected to continue decreasing in value. If the taxpayer were to reinvest in the same stock within less than 30 days, however, the tax loss is disallowed due to the wash-sale rules,” she said.

Tax loss harvesting works best when the taxpayer has capital gains to offset the losses “since capital losses in excess of capital gains are limited to $3,000 per year,” Keylor added. “Short-term gains are ideal to offset since they are taxed at ordinary tax rates. Many of our clients took advantage of tax loss harvesting in late 2018 and were able to lower their tax bills accordingly.”

Another strategy for downturns: Convert a traditional IRA to a Roth IRA. “At conversion, the taxpayer will pay ordinary income tax rates on the value of the account,” Keylor said. “Once converted, those assets grow tax-free. If left in a traditional IRA, those assets are taxable on distribution. Converting during a downturn will yield a lower tax bill than if the same conversion were to occur during an up market.”

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