When it comes to paying taxes, most of us tend to align with the notorious spend thrift Ebenezer Scrooge: We favor giving as little of our hard-earned money to Uncle Sam as possible! So as the end of the year approaches, what proactive steps can you take in your investment portfolio to help to minimize your tax burden? Let’s look at two of the most common investment-related strategies RegentAtlantic implements for clients.
The first—and fairly common—method of seeking to manage taxes is a process called “harvesting”—and no, we don’t mean the kind you do on fall weekends at the pumpkin patch. We’re referring to tax harvesting, and it simply means taking care in our investment decisions in carefully selecting the time to realize investment gains and losses. Just as with a farmer’s crop, harvest too soon or too late and you may end up with a few less pumpkins, or dollars, in your basket.
Before any harvesting decisions are made, it’s important to take an inventory of the gains and losses in your portfolio. Hopefully you have gains, but do you also have losses that can be used to offset the tax liability on those gains? And about those gains: Are they short-term (i.e. held less than 12 months) or long-term? This matters, because gains on short-term positions are taxed at a much higher rate than long-term gains.
Let’s look at a simple example using a couple of U.S. large company stocks: Exxon and Chevron. Let’s assume you bought Exxon six months ago, but due to market volatility, the position has declined 15%. We never like to see a decline in investments, but remember that even losses could carry benefits if they’re used appropriately. One way to help to reduce your potential tax liability is to sell the Exxon stock, realize the 15% loss and use it to offset other gains either this year or even potentially in the future. Also, you don’t have to keep those proceeds in cash after the sale. You could even retain your exposure to energy stocks by buying stock in a similar company (for example, Chevron). Once 30 days have passed (what’s called the “wash-sale period”), you could potentially sell the Chevron stock and buy back the Exxon stock.
Of course, if you decide to go through this harvesting process, you need to be sure the potential benefit is worth the potential costs. This is where it’s wise to consult your Wealth Advisor. In addition to paying trading commissions, there is also the chance of a significant price change in either the original asset (Exxon in our above example) or the replacement asset (Chevron) during the time you’re implementing this strategy. If your hope is to swap back into the original investment (Exxon) after the wash period, you might have to take a short-term gain on the replacement position (to the extent it appreciated during the 30 days) to sell it and repurchase your original security. That’s why you want to be sure the loss is significant enough to justify the costs and uncertainties. This isn’t a move to make lightly, or without talking to your Wealth Advisor.
There may also be times when a completely different approach is appropriate. If you expect to be in a higher tax bracket in the future, you may want to accelerate gains into this year (i.e. gain harvesting). As you can see, when you plan for taxes, it is important to emphasize that every individual investor’s strategy is unique. There’s no cookie-cutter answer to reducing taxes.
As the year-end draws near, another proactive step you can take in your investment portfolios is to seek to minimize your exposure to taxable year-end distributions paid by mutual funds and held in taxable accounts. Read more about this in “When to Watch out for a Fund’s Holiday Bonus.”
These are just two of the most common strategies RegentAtlantic suggests for ways to that may help to reduce clients’ taxes. However, depending on your goals and personal situation, there are many other alternatives, including maximizing qualified plan contributions, Roth conversions, and strategic gift-giving. To learn more about how all of these options could fit into your portfolio and financial plan, give your Wealth Advisor a call.
Important Disclosure Information
Please remember to contact RegentAtlantic if there are anychanges in your personal or financial situation or investment objectives forthe purpose of reviewing our previous recommendations and services, or if youwish to impose, add, or modify any reasonable restrictions to our investmentmanagement services. A copy of our current written disclosure statementdiscussing our advisory services and fees is available for your review uponrequest. This article is not a substitute for personalized advice fromRegentAtlantic. This information iscurrent only as of the date on which it was sent. The statements and opinions expressed are,however, subject to change without notice based on market and other conditionsand may differ from opinions expressed in other businesses and activities ofRegentAtlantic. Descriptions ofRegentAtlantic’s process and strategies are based on general practice and wemay make exceptions in specific cases.
Please remember that RegentAtlantic does notprovide tax advice. Please consult with a tax professional of your choosingprior to implementing any of the strategies discussed in this article.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.