Year-end conversations with friends and family often remind us of last-minute items we need to complete to close out the year. We should also have a year-end planning conversation with our tax adviser.
When families have gathered, financial and estate planning tasks can be easily accomplished as many signatories are present and logistical challenges are overcome. If parents are in the retirement phase, it may be time to review their original wealth-transfer plans in greater detail as a family.
One goal is to confirm there are still sought-after tax advantages as proposed new codes are considered. Reviewing beneficiary designations and legal documents for out-of-date language is also a best practice.
Family gatherings are good for strategies and general conversations about legacy transfers and other current fiscal issues.
Sure to top the list is the proposed changes to our tax code. As of late November, there are three official proposals and a variety of modified alternatives making their way through legislation.
Keep a close eye on changes affecting tax harvesting and the capital gains rates. The proposals suggest no changes to capital gains would occur in the near future, but strategic tax-loss harvesting discussions are an important year-end priority.
MINIMIZING TAX LIABILITY
Tax-loss harvesting is effective at minimizing tax liability on sales of appreciated assets.
Realized gains are offset by losses on the sale of assets that have depreciated in value. By selling investments that have declined below their purchase price, a tax loss is generated, and that loss can be used to offset other taxable items, thus lowering your taxes.
Because there is no limit on the amount of capital losses that can be applied to capital gains, tax harvesting may provide a huge opportunity to reduce tax liability. If an investment that you have held for more than 30 days has lost value, but others have become big winners, a sale to offset gains with losses may be prudent.
RULES TO PONDER
It is important to keep this in perspective of your overall investment strategy and portfolio design. This strategy can be tricky, so always consult a tax professional before embarking on this strategy.
Tax professionals are up-to-date on all of the rules to consider:
<Estimate your capital gains tax liability by reviewing your statement cost basis information and purchase dates with respect to each asset and purchase lot if there were multiple buys.
< Avoid wash sales. When selling a security at a loss and replacing it with the same item or a substantially identical asset, you must wait 30 days after the sale to repurchase the new security. After the 30-day period, the wash sale rule no longer applies. In addition, shares sold for a loss must have been in the investor’s possession for more than 30 days.
<Realized losses can offset gains and reduce ordinary income up to $3,000 per year. Losses may be carried over to the next year and do not expire. A capital loss can first be used to offset capital gains and then up to $3,000 of ordinary income per year.
<Net short-term capital gains (property such as stocks and bonds sold within one year of acquisition) are subject to taxation as ordinary income at graduated tax rates, usually your marginal tax rate.
<The tax rate on long-term net capital gains is usually no higher than 15 percent for most taxpayers and could be taxed at 0 percent if you’re in the 10 percent or 15 percent ordinary income tax brackets. However, a 20 percent tax rate on net capital gain applies to the extent that a taxpayer’s taxable income exceeds the thresholds set for the 39.6 percent ordinary tax rate.
PART OF AN OVERALL PLAN
Managing gains and losses each year should be a part of the overall strategy in nonretirement accounts. Consider working closely with a licensed tax professional and a financial adviser.
When done correctly, tax loss harvesting and portfolio rebalancing can work well together.
Jeffrey C. Deloglos is trust officer at ESSA Bank & Trust, Hanover Township, Northampton County. He can be reached at firstname.lastname@example.org.