Election volatility began to calm as the markets dropped slightly last week. Inflation continues to remain sticky, which led to doubts about another rate cut in December, further depressing the markets.
As we approach year-end, now is a good time to consider year-end tax moves. You have until April 15th to contribute to Individual Retirement Accounts and Health Savings Accounts. Other moves need to be done prior to year end. Here are 3 things to discuss with your tax and financial advisors:
First, if your income is lower this year, due to job changes, time out of the workforce, or retirement, consider a Roth conversion. A Roth account is funded with after-tax dollars. You can move money from a traditional retirement account to a Roth without penalty, but you’ll have to pay the taxes on any money you move. We look at tax brackets, and try to fill lower brackets with Roth conversions, to gain years of tax-free growth and reduce Required Minimum Distributions later in life.
Second, consider tax harvesting. While we do this on a daily basis throughout the year, year-end is another time to think about harvesting gains or losses. If you have a current tax loss, or a loss carry-forward, you may want to harvest gains by selling stocks that have gone up in value. If you’re looking at a potential tax bill, tax-loss harvesting may help offset some of those gains. Work with your advisor and tax professional to reposition your portfolio in a tax-efficient manner.
Third, give efficiently. If you have a big revenue year, you can offset some of that income with charitable giving. Efficient ways to do that include giving appreciated stock, or stock that has gone up significantly in value, directly to the charity. You receive a tax deduction for the amount of the gift and avoid the capital gains you would have otherwise paid. You may also consider a Donor Advised Fund, where you give several years’ worth of charitable giving to a fund you manage, and then choose who receives contributions later. Immediate tax deduction, future contributions to the causes you support.
The triple tax play is to gift appreciated stock to a Donor Advised Fund to offset a Roth conversion. Let’s say I own $100,000 of Spacely Sprockets stock that I paid $1,000 for many years ago. If I sell it, I’ll have a capital gain of $99,000. But, if I gift that stock to a Donor Advised Fund, I have no capital gains, and I have a $100,000 tax deduction. I can then convert $100,000 of my retirement account to a Roth IRA and the $100,000 of income is offset by the $100,000 tax deduction. I don’t have to decide now what charities I want to contribute to, that can be done at any point in the future.
As with anything in life, make sure you discuss this with your tax professional and financial advisor. They can run projections for your specific circumstances.
Your action item this week is to pause and reflect on everything you have for which you are grateful. Focusing on the abundance in your life can help relieve anxiety. And as we approach the hustle and bustle of the holidays, time for Thanksgiving, can provide perspective.
Be sure to check out our website at covingtonalsina.com, or our Facebook page, for more information and to register for our upcoming educational events.
CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.