Fall 2019 Quarterly Newsletter
Author: Larry W. Carroll, CFP®
It is that time of the year again. No, I don’t mean football season or the turning of the leaves… What I mean is that it is time to start working on tax management. October is usually the month when we begin reviewing our taxable accounts with a specific focus on tax opportunities.
Many of you know that I began my work life as an accountant before transitioning to become a financial advisor. Leaving accounting was one of the best decisions I ever made, but I have never abandoned thinking about taxes and tax strategies. I don’t give tax advice nor do accounting work, but I do impact the tax returns of my clients with every investment decision I make. I also focus on minimizing and deferring taxes whenever possible because this can have an enormous impact on both wealth creation and wealth stability for any long-term investor.
So what can we do? Well, let’s start with tax-loss harvesting. By selling a position at a loss we can book that loss today and move into a new investment. The new investment could be very similar to the piece sold at a loss. Realizing this loss allows us to consider a few options:
- Offset any other positions that sold for gains.
- Potentially reduce taxable income by $3,000.
- Carry the loss forward indefinitely to offset future gains.
By harvesting losses in taxable portfolios we can ensure that more capital gains come to our clients as long-term gains, which are taxed at a lower rate for most individuals. A married couple with taxable income below $78,750 in 2019 pays nothing in federal taxes on long-term capital gains. Even at the highest levels of income long-term gains are taxed at 20% instead of 37%. Many of my retired clients benefit from making long-term gains and deferring taxes when possible.
This doesn’t mean that you should never pay taxes. Sometimes in order to get out of a position some taxes must be paid. Remember that families benefit from minimizing taxes over their lifetimes, which may not be the same as minimizing taxes during the current year. Ultimately, I want my clients to earn a profit and often that means taxes will be due. So during this time of year I review year-to-date trades and try to examine the outlook for taxes on our portfolios.
Another thing to keep in mind is that mutual funds start to announce taxable distributions. We examine every fund we own to assess the distributions before they hit an account. This may lead to additional trading with the goal of keeping short-term gains to a minimum and making sure that the taxes owed are reasonable.
But what is reasonable? The truth is there isn’t one right number for every client. The best thing we can do is have an open dialogue with our clients before tax time. If investments impact your taxes in a way that is uncomfortable or if you have expectations about the taxes on an investment account, speak up now! There may still be time in 2019 to make sure that we take your personal tax situation into account. If you aren’t sure about how taxes will affect your portfolio, then let’s have that conversation as well. Don’t worry, my approach is to always start with paying fewer taxes later whenever possible.
This article was featured in our Fall 2019 Quarterly Newsletter available here:
The views are those of Larry Carroll and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Investors cannot invest directly in an index.Tax Planning