July 2022
Tax Planning

Well, it’s official, the market just finished the worst first half of the year since 1962 down 20.6%.  What will happen the rest of the year?  Anything is possible but if history is a guide, the last 5 times that the market was down greater than 15% in the first half of the year, the market rebounded in the second half.  Down markets create opportunities for portfolio rebalancing, and we are actively monitoring investment portfolios to take advantage of that.  In addition to portfolio rebalancing, there are several tax strategies that can create long term benefits.  Below is a list of proactive tax strategies that we think are worth exploring in this current market environment.

Tax Loss Harvesting:

How it Works: When positions drop in value below your cost basis in a non-retirement account, it may make sense to sell the security to capture the loss.  We generally recommend simultaneously purchasing another security to make sure you do not miss out on any market recovery. The IRS does not allow you to repurchase the same or a “substantially identical” investment within a 30-day window.  If this period is violated, you will be subject to the “Wash-Sale Rule,” disallowing the loss, which could make your taxes for the year higher than you hoped.

Planning Tip: We are actively reviewing your portfolio for opportunities to tax loss harvest meaningful losses; however, it’s always good to connect with us before year end to make sure we aren’t missing something you did outside of your portfolio that we manage.

Benefit:

• A means of improving after-tax return on taxable investments.

• Most often used to limit the amount of taxes due on short-term capital gains, which are generally taxed at a higher rate.

• Tax losses can be used to offset future capital gains. If you do not have capital losses to offset, you can use up to $3,000 per year to offset ordinary income and may be carried forward into following tax years. These losses can also be used to offset gains from real estate sales or gains from selling a business.

Reducing Concentrated Stock Positions:

How it Works: If you own a highly concentrated stock position and it has dropped in value, consider reducing exposure to concentrated stock positions and reinvesting in the broader market.  By diversifying you may not rebound as quickly but it will spread out your risk and help you avoid having all your “eggs in one basket”.  Oftentimes, the concentrated position is highly appreciated and therefore you have a large gain.  You may also find it helpful to sell other positions that have incurred losses to help offset some of the large gains you have in a concentrated position, allowing you to diversify your risk. 

Planning Tip: We encourage taking advantage of strategies that help reduce concentrated equity.  If you’d like to discuss other ways to address a concentrated position, please give us a call.

Benefit:

• Diversification helps to reduce company specific risk in your portfolio.

Roth IRA Conversions:

How it Works: When your Traditional IRA has declined in value, you may find it helpful to do a Roth conversion while the market is low.  Roth Conversions involve converting funds from your Traditional IRA to your Roth IRA. You may incur taxes on the conversion, but this is an advantageous strategy if you are able to convert while you’re at a low tax rate and then the funds can recover in a tax-free vehicle. 

Planning Tip: It is important to work closely with your Advisor and CPA on how much to convert each year.  We have tax software that can show you the impact of the Roth conversion and the optimal amount to convert without pushing you into a higher tax bracket.

Benefit:

• Potentially lower your future taxes

• Tax-free growth

• Tax diversification

• Roth IRAs are not subject to Required Minimum Distributions, like Traditional IRA’s are

• Be aware, the SECURE Act, which passed at the end of 2019, changed how IRAs and Roth IRAs pass to beneficiaries. Under new rules, IRAs and Roth IRAs must be distributed to non-spouse beneficiaries within 10 years. Roth IRAs will still be able to pass tax-free, so this is an advantageous estate planning strategy

Tax planning is an important part of every investor’s long-term plan, and we are here to help you explore various options. If you have specific questions or would like to understand if you can benefit from any of these tax strategies, reach out to us. We look forward to working with you and your CPA to understand what options may be available to you.

If you have questions, please contact us.

MARKET UPDATE
FINANCIAL PLANNING
401(K) ALLOCATION

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