The best year-end tax strategies from top-ranked advisors – including a ‘once in a multiple-decade opportunity’

Tetra Images | Tetra images | Getty Images

After several months of soaring inflation, stock market volatility and interest rate hikes, many investors are feeling weary about their finances. 

But the prolonged stock market downturn offers a silver lining for some investors: opportunities to reduce their tax bill.

Here are some of the most popular year-end moves to consider, according to top financial advisors. 

‘Once in a multiple-decade opportunity’ with fixed-income losses

With the S&P 500 Index down more than 20% this year, many advisors have explored so-called tax-loss harvesting, using losses from brokerage accounts to offset other profits. Once losses exceed gains, you can subtract $3,000 from regular income and carry the rest forward for future years.  

While many focus on stock market losses, there’s also a “once in a multiple-decade opportunity” to harvest declining fixed-income assets, such as bonds, said certified financial planner Devin Pope, partner and senior wealth advisor at Albion Financial Group in Salt Lake City. The firm ranked No. 3 on CNBC’s 2022 FA 100 list.

However, you need a “game plan” before selling assets if you’re hoping to maintain portfolio exposure, said Pope, because the “wash sale rule” blocks the tax write-off for buying a “substantially identical” asset within a 30-day window before or after the sale.

Roth IRA conversions may pay off in a down market 

Another popular strategy when the stock market dips is a Roth individual retirement account conversion, said Nick Strain, a CFP and senior wealth advisor at Halbert Hargrove, in Long Beach, California. The advisory firm ranked No. 8 on the FA 100 list.

You can use Roth conversions to transfer pre-tax IRA money to an after-tax Roth IRA, for tax-free future growth. The downside is you must pay upfront taxes on the converted balance. 

More from FA 100:

There are two benefits of a Roth conversion in a down market, according to Strain. You can buy more shares for the same dollar amount, and you may owe lower taxes on the conversion, depending on how much you transfer, he said.

But you’ll need to consider how the extra income may affect your taxes, Strain said. For example, boosting your earnings may trigger higher Medicare Part B and Part D premiums. “It’s really important to know now instead of being surprised next year,” he said.

‘Bunch’ charitable gifts with a donor-advised fund

Despite economic fears, many investors are still eyeing 2022 charitable gifts.

But with the $25,900 standard deduction for married couples filing together for 2022, most taxpayers won’t itemize write-offs, making it harder to claim a deduction for charitable donations.

However, if you give annually, you may consider “bunching” those donations together with a so-called donor-advised fund, said Cory Robinson, vice president and portfolio manager at Tom Johnson Investment Management in Oklahoma City, which ranks No. 30 on the FA 100 list.

Donor-advised funds are like a charitable checking account, allowing a bigger upfront deduction and the ability to make future gifts from the account, he explained.

“The ideal way to do it is by funding it with appreciated stock,” Robinson said. Here’s why: There’s a bigger write-off for profitable investments than cash — and you’ll dodge capital gains taxes you’d otherwise owe when selling.

Sophie Tremblay

Similar Posts