3 Tax Strategies for the 2020 Bear Market

CAN DO NOW THINGS YOU

PETE HOGLUND Senior Vice President, Financial Advisor

When markets take a tumble, it’s easy to get caught up in headlines. But it’s important to take a step back and think about the broader context surrounding the bear market. The good news is that, even in a market that saw the quickest fall in history, there are some opportunities for you to proactively reduce your tax bill for next year:

1

Utilize Tax-Loss Harvesting

With a bull market lasting a remarkable 10 years following the last recession, chances are you haven’t done much with tax-loss harvesting recently—but now you could. Tax-loss harvesting cannot restore losses, but it can mitigate them. No one likes to experience investment losses, but you could have the opportunity to use those losses to offset future capital gains, thereby avoiding capital gains taxes down the road.

In short, you can sell Security A at a loss to offset the capital gains tax liability on Security B, lowering your personal taxes, assuming the sales meet certain conditions. That said, the effectiveness of tax-loss harvesting can vary depending on the composition of your portfolio. If you need cash and are thinking about withdrawing from your portfolio, work with a financial advisor to consider how to strategically sell assets, even if it’s at a loss, in order to help set you up to turn lemons into lemonade.

2

3

Maximize Waived 2020 RMDs

With the passage of the CARES Act, required minimum distributions (RMDs) from regular and inherited IRAs and defined contribution plans (401(k), 403(b), etc.) are suspended for 2020. If you do not need your RMD to fund your lifestyle expenses, you are encouraged to not take the RMD, which may mean stopping future monthly distributions or automatic annual processing of your RMD.

By forgoing your RMD this year, you’ll have more money invested to take advantage of any gains in value following the down market. Skipping RMDs may also put you in a lower tax bracket, which gives you the chance to make some creative choices. For example, you could use this opportunity to talk to your financial advisor about taking advantage of Roth conversions, selling appreciated stock or other assets, or distribution planning.

Strategize for Tax Efficiency

It’s easy to get “stuck in our ways” when it comes to our asset class allocations and tax treatments. But now is a good time to review your investments with your financial advisor to discover any tax inefficiencies. For example, if you’re holding stocks that consistently pay out dividends, it could be in your best interest to hold them in qualified accounts to avoid paying income tax rates on dividend income.

On the other hand, municipal bond interest is typically tax-free and could be more useful in taxable accounts than qualified ones. Maybe you’ve already talked about this with your advisor in the past and decided that relocating didn’t make sense then, but now is the time to revisit these asset allocation conversations. That’s because during market volatility, you might find opportunities for repositioning that were not there in a bull market.

While no one likes to see the markets take a dip, the current bear market does provide some strategic opportunities that you could take advantage of. Make sure you’re in contact with a financial advisor to help ensure you are making the most of these circumstances to plan for your future.

This article was originally published on May 5, 2020.

CAN DO NOW THINGS YOU

6 ESSENTIAL TAX-LOSS

HARVESTING TIPS

CHRIS HAARSTICK Director of Investments

With the recent extensions of federal tax filing and payment deadlines, your taxes may not be due until July. But now might be a good time to think about “tax-loss harvesting” to limit the recognition of short-term capital gains that are typically taxed at a higher federal income tax rate than long-term capital gains.

Tax-loss harvesting cannot restore losses, but it can mitigate them. In short, you can sell Security A at a loss to offset the capital gains tax liability on Security B and lower your personal taxes—if the sales meet certain conditions.

With that in mind, here are six essential tax-loss harvesting tips:

1. You Don’t Need to Wait Until the End of the Year

You might think you have until the very end of the year to address this situation, but as far as the tax year goes, you don’t.

This is because the IRS does not approve of buying and selling an asset simply to lower your taxes. Called the “wash-sale rule,” a loss will be disallowed if the same asset/security is sold for a loss and repurchased within 30 days (as you must report on Schedule D of the 1040 tax form). In certain cases, that 30-day period can expand to 61 days or, if you want to stay invested in the same security after declaring a loss, 30 days after the initial purchase date and then another 30 after the date of the sale.

Let’s say you love a certain stock and want to stay in it for the long haul, but right now the stock is down substantially from your purchase price. To avoid a wash sale, if you bought it more than 30 days ago, you can sell it, otherwise you need to wait for those 30 days to elapse. Then, you need to wait 31 more days before you can repurchase it.

However, if you simply want to stay invested in the same sector (say, software and services), you do not need to wait to reinvest the same dollar amount in an equivalent asset. So, you could take the proceeds from that first stock sale and at any time invest them into another stock in that sector.

2. Leverage Bouts of Market Volatility

While no one likes to see their balance fluctuate during periods of market volatility, if you have significant losses in your portfolio, you can “bank” those losses now to offset future gains as the markets recover. Measure the gains and losses now (or have your financial advisor do it) and keep an eye out for moves in those securities over the next month or so to enhance your opportunity to make a tactical exit.

There’s no limit on the amount of capital losses that can be applied against capital gains. However, only $3,000 of it can be applied against ordinary income for the tax year with the balance carried forward. That said, the time value of money means that the tax liabilities in the future should be less costly than the liabilities you face now.

4. The Wash-Sale Rule Applies Across Your Portfolio

You need to apply the wash-sale rule across your portfolio, including non-taxable accounts and spousal accounts. This means if you sell individual holdings of a certain stock, you cannot buy another block for your IRA or your spouse’s IRA without waiting until 30 days after the sale. It also means that if you recently purchased a security for your IRA, you need to wait 30 days before selling individual holdings of it in a taxable account to receive the full amount of capital loss.

5. Watch Your Transaction Costs

While we are all about maximizing tax efficiency, it makes no sense to throw cost efficiency out the window in an attempt to reach maximum tax efficiency. Buying and selling have transaction costs that need to be balanced with how much you can save in taxes.

6. Its Effectiveness Depends on Your Portfolio

The effectiveness of tax-loss harvesting can vary depending on the composition of your portfolio. For instance, if you’ve taken a look over your investment portfolio’s performance this year, you likely have registered some gains in equities and may have some losses in fixed income. In such a case, you might consider selling some fixed income assets, as well as any stocks that have dropped substantially.

The overall goal, of course, is to keep more of what you make. It’s not too late to prepare and take steps to optimize your portfolio for tax efficiency. When the market hands you lemons, Uncle Sam allows you to turn it into lemonade by creating a tax benefit. If you have more questions about tax-loss harvesting, we’re here to help. Reach out to a financial advisor today to get a clearer understanding of your tax-loss harvesting options.

This article was originally published on April 23, 2020.