The last quarters of the year always create tax planning opportunities. But a rocky stock market and recent changes in tax law complicate such moves as we head toward Dec. 31.
“It’s a very important time to run tax analysis with [high-net-worth] clients and often their CPA,” said Landon Rogers, wealth advisor at Gratus Capital in Atlanta. “It could make sense to make charitable contributions to a donor-advised fund, additional tax loss harvesting, family giving strategies, funding irrevocable trusts and so on.”
“With markets volatile, we’re doing additional tax loss harvesting this year,” Rogers said. “We’re looking at opportunities in equities and private investments given the pullback in markets this year. It has been a very challenged year for fixed income, so we’ve been examining opportunities in private markets.”
Another planner said tax-loss harvesting is an important consideration this year.
“The market is down so far this year and some capital loss opportunities may exist in their portfolio. Claiming these losses could not only offset other capital gains this year, but also create a capital loss carry-over to offset capital gains in the future,” said Scott D. Kadrlik, a CPA and managing partner at Meuwissen, Flygare, Kadrlik & Associates in Eden Prairie, Minn. “If they want to keep these loss stocks in their portfolio, they should consider selling the stock and buying them back after 31 days to avoid the wash sales rules.”
Harvesting losses can be used in different ways, a variety that can become important as the calendar runs out. “You can offset up to $3,000 of ordinary income” said Gerald B. Goldberg, CEO and co-founder of GYL Financial Synergies in West Hartford, Conn.
“Depending on the amount of losses, you can eliminate or at least reduce capital gains already realized in the current year,” he said. “Under the current tax code, realized losses can be carried forward and can be used in subsequent years. Whatever tax benefit you don’t realize now, you will still be able to use later.”
It may be time for clients to consider selling poor performers, another advisor said.
“Sometimes the last quarter is the time, but certainly this year with the market volatility, people should have been looking to sell losers and replace them,” said Morris Armstrong, enrolled agent and RIA at Armstrong Financial Strategies in Cheshire, Conn. “Keep in mind that virtual assets don’t have any wash-sale prohibitions and that the sale and buy back can occur within seconds” though sometimes with conditions, he added.
Loss harvesting is in fact no longer confined to just the end of the year. “With the advent of direct indexing strategies and lower significant transaction costs prevalent today, it’s no longer necessary to wait,” Goldberg said. “Direct indexing provides an opportunity for clients to obtain the exposure to a specific index while at the same time having the ability to harvest losses that can be used to offset realized capital gains.”
Familiar end-of-year moves Goldberg mentioned include a Roth IRA conversion for those who think they’ll be in a higher tax bracket in the future; using the $16,000 per-recipient gift tax exclusion to transfer wealth over time (though it doesn’t reduce a current tax bill in the current year); and a tax-saving qualified charitable distribution (QCD) from IRAs.