Year End Tax Planning

A proactive advisor will always say “no matter what time of year it is, tax planning is important”.  I refer to these professionals as being “tax forward”.  Employing a year-round tax planning focus helps investors reduce costs, increase performance, reduce taxes and take advantage of opportunities that may reset in the New Year.    Here of some year end  tax planning strategies that might apply to your situation.  

• Tax Loss Harvesting:  Tax loss harvesting is the equivalent to using a coupon at a store.  When reviewing a taxable investment portfolio at the end of a year, look for securities that may have a loss since being purchased.  This loss which may only be available for a short time serves as a “tax coupon” and can be used to offset short or long-term capital gain distributions and realized gains.  If neither of those apply now, then you can carry the loss forward to be used in future years.  Be mindful of the wash sale rule and how it may apply to fast moving securities, if you plan on repurchasing the investment after the loss is realized.  When used effectively this “tax coupon” strategy can save tax dollars now or at some point in the future.   

• Tax Gain Harvesting:  Why would someone suggest realizing tax gains in an article pertaining to tax planning….great question!  Some investors have fluctuating income.  In year where income is low it may serve as an opportunity to redistribute some of the gains of an extremely appreciated security to better reduce concentration risk.  It may also allow an investor to convert some of their Traditional IRA dollars to a Roth IRA for future tax reduction benefits.   

• Capital Gain Analysis:  Mutual Funds sometimes pass on capital gain distributions to their shareholders.  This is the result of investment decisions made throughout the year by the portfolio manager of the fund resulting in taxable gains.  We recommend conducting a review of your portfolio in advance of these potential distributions to attempt to minimize the tax, if possible.  This strategy has value in down to flat markets.  If an advisor can show a client how to avoid a potential capital gain distribution in a down to flat market, they demonstrate a value outside of just investment returns.   

• Dividend Income:  How much of income in your portfolio is qualified, non-qualified and/or tax free?  These are important distinctions to understand and will result in greater after-tax dollars in your pocket.         

• Coordinating with your Tax Professional:  If you are a high net worth investor or self-employed.   You or your advisor should be passing this information along to your tax professional in advance of the New Year.  Having them review this data along with your yearly income estimates may open the door to other potential tax savings or at least prepare you for what’s to come in April!     

Applying a “forward thinking” mindset to your financial plan will help you increase your after-tax returns and take advantage of opportunities when available!