Tis the Season for Tax Harvesting…
An exerpt from a June 2018 commentary –Dealing with Unrealized Capital Gains
Harvesting losses on an annual basis is a prudent strategy that we employ and where we have more flexibility than other money managers because we focus on buying individual securities. In addition to harvesting losses, recognize that managing your gains is part of investing (rebalancing). The value of continuing to defer capital gains taxes is not as great as it seems. The liability is already there. Don’t let deferring taxes dictate your investment strategy or potentially prevent you from meeting your overall financial goals.
The goal of a capital gains harvesting strategy should be to take whatever gains can be absorbed within in your current capital gains tax bracket.
Ex. Leslie and Jeff are married with a combined AGI of $170,000. They are looking to switch to a new advisor with their $1,000,000 portfolio, but are having trouble pulling the trigger due the $200,000 of long term capital gains in their portfolio.
Given that they have another $80,000 before they hit the $250,000 AGI threshold where the 3.8% Medicare tax kicks in, they set a capital gains budget of $80,000. This will allow them (or their new advisor) to go through their portfolio and transition far more than $80,000 in total value. There may be some positions that their new advisor will want to keep, part of the portfolio may not have any gains and there may be some other losses that can be realized as well. So it’s feasible that they could transition $500,000 or more of assets without triggering the 3.8% Medicare surcharge and then continue the process in the following tax year.
The strategy is obviously more effective for those in the 0% capital gains tax bracket (which could apply in a low income year) where the gains are effectively tax-free – at the federal level. State income taxes may still apply. But even at higher levels, you may be able to work through your cumulative gains with a few years of gains budgeting.
For those with a concentrated position in a single stock, a variation on the tax bracket budgeting is staged selling. Rather than making your decision an ‘all or none’ proposition, you instead commit to sell in stages over time to diversify out of large single positions. With a concentrated position, investors’ concerns are both losing out on additional upside by selling too soon and riding the position down in a bear market. Only one in a million ever gets it perfect and, by committing to a process, you take the emotion out of the decision and you can set up a pre-determined plan within your capital gains tax bracket.
As always the fourth quarter is a time when we review our clients’ taxable accounts and try to reduce any realized gains by selectively taking losses. Please let your ACM advisor know if you have gains or losses in your taxable non-ACM managed accounts. With only a few remaining trading days of 2018 we can still work with you to help mitigate taxes.
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