As year-end comes about, there are time-sensitive decisions to make and tax incentives to capitalize on. With a year that has had as much volatility as 2020, nimbleness may be the order of the day. Such volatility makes portfolio management and portfolio tax planning a special challenge.

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Many long-term investors likely had unexpected buy and sell moments in their portfolios.

Whether or not they are happy with those decisions at this point, the year hasn’t ended so they still may have the opportunity to improve their positions by balancing losses with gains utilizing a strategy called “tax-loss harvesting”.

Wait… my losses have value too?

The fluctuations in value of your portfolio only represent potential. When a transaction is created by selling securities, it creates a taxable event by setting that value at the date of the transaction, turning that potential or unrealized gains/losses into realized gains/losses.

Realized losses still have value, because they can be used to offset gains for tax purposes. If you bought 1,000 shares of a stock at the beginning of the year worth $100 each, and sold them in April for $60 each, you realized $40,000 of short-term capital loss.

The offset can be quite meaningful depending on your tax bracket. If you’re taxed at the highest rate of 37% and have $40,000 in short-term gain from another stock to be offset, that $40,000 offset would eliminate $14,800 in potential taxes that you would have otherwise faced on that gain.

Security sales are taxed differently based on how long the securities are held, and short-term and long-term capital losses must first offset in their own category before they can be applied to other gains. If the losses are larger than both short-term and long-term gains for that year, they can be used to offset up to $3,000 in ordinary income each year too and be carried over to future years for offsetting until death.

What’s the catch?

Tax strategy should be an important part of your investment planning, but generally shouldn’t be your primary motivating factor for buying or selling. The largest caveat to tax loss harvesting is that you can’t sell a security to “realize” the loss, only to rebuy it immediately because you still want to own it. That is known as a “wash-sale”, and the IRS rules dictate that for 30 days you cannot buy another security that is “substantially identical” to the one you sold and recognize the capital loss on the sale.

Additional consideration:

Major decisions in portfolio management may have caused a shift in the weight and risk profile you may realize, or one that could be easily overlooked. What’s more, in this uncertain economy your risk profile may have changed. Revisiting your asset allocation is a good idea as the year ends.

I’ve deferred my contributions, is now the time to make them?

Given the uncertainty throughout the year, many may have foregone savings options that have tax benefits and annual contribution limits. If your financial footing has become steadier, it may be a good time to take advantage of those options while you can:

Have you maxed out your IRA contribution for 2020?

The IRA contribution limits are $6,000 for an individual and $7,000 if you’re over 50 years old. Depending on your tax bracket and anticipated future tax bracket, it may be worthwhile to consider whether a Traditional or Roth IRA is more appropriate. You can have both too, but the contribution limit is for the total contribution in a year.

Have you maxed out your HSA contribution (if you have a high-deductible health plan) for 2020?

The limit for 2020 is $3,550 for an individual plan or $7,100 for family coverage (plus $1,000 if you’re over 55 years old). This option can be particularly attractive because the income used is pre-tax, and isn’t taxed on its way out of the account either as long as it’s for qualified expenses.

Although you would be reducing your penalty-free access to these funds, the tax savings can become substantial, especially if you have a long-time horizon.

What about charitable giving?

Americans are generous and philanthropically minded, and those attitudes shine every year during the holiday season as the end of the year approaches. This year, there are additional options available that have come from the CARES Act regarding the deductions for charitable gifts:

  • For those who itemize their deductions, the cap on the charitable deduction for gifts of cash has been lifted to 100% of adjusted gross income, up from the usual 60%.
  • For those who do not itemize, they will be permitted a $300 adjustment to income for their charitable giving and still get the full standard deduction.

An additional consideration for the charitably minded retiree might be a gift from an IRA. Taxpayers who are 70½ or older may direct that up to $100,000 be sent to charity from their IRAs. Amounts distributed in this way will satisfy minimum distribution requirements (suspended for 2020), but they won’t be included in the taxpayer’s income.

Is there more to consider?

 These ideas are just the beginning, intended solely to simulate your thinking.

Arvest Wealth Management does not provide tax advice, so be sure to consult with your tax advisor before taking any action.  He or she can fill in those important details.  Turn to Arvest Wealth Management for answers to your investment and financial management questions.  Put our experience to work for you!



Arvest Wealth Management does not offer tax or legal advice – consult a professional. This content has been provided by Merrill Anderson and is intended to serve as a general guideline.


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