TAX LOSS HARVESTING
A popular strategy called tax-loss harvesting should be considered. The stock market has been rough this year, with various investment asset classes showing negative returns. If you purchased emerging market mutual funds over the last 12-months, for example, then you likely have long-term losses. You can sell those losing funds and individual stocks before the end of 2015, and capture the losses, to offset any gains incurred this year, or if you don’t have any gains, you can use up to $3,000 of losses against your current income. Tax losses carry forward indefinitely.
Within the tax code, there is a provision that prohibits investors from repurchasing the same mutual fund, or individual security over the next 30 days and claiming a loss. This is called the wash-sale rule. If you want to maintain a long-term objective of owning emerging markets in your portfolio, but don’t want to be out of the market over the next 30-day wash sale period, then you can immediately purchase a different emerging market mutual fund, as long as the fund isn’t identical in nature to the fund you sold.
The Roth IRA offers many advantages over the typical IRA. For starters, the Roth doesn’t require individuals to make mandatory distributions at 70½, nor are Roth IRA distributions taxable. Your financial advisor can help you determine if converting all, or a part of your IRA to a Roth makes sense for you.
Many charitable giving strategies are available to lower taxes and provide needed funds to a favorite charity. One often overlooked charitable option is the donor-advised fund (DAF). These are sometimes referred to as mini private foundations and are offered through a number of channels, including our own local Community Foundation of Sonoma, or many different brokerage firms (e.g. Fidelity, Vanguard), or a number of other institutions your investment advisor of choice may be using for their clients. The DAF has the benefit of ‘front’ loading donations. In other words, if you donate $5,000 to a charity annually, you could open a donor-advised fund and either deposit $25,000 in cash or better yet low basis stock and receive up front a $25,000 charitable deduction for 2015. Any sales of low basis securities incurring a gain upon sale inside the DAF are tax free. It just might work out that a $25,000 deduction for 2015 will save more in taxes, than a $5,000 donation each year over the next five years.
At age 65, we are required to make Medicare Part B payments, which for the vast majority of Americans is currently $104.90 per month taken from our social security benefit. Part B premiums are based upon the Modified Adjustable Income (MAGI) an individual or couple report on their tax returns each year. For the most part, the calculation for MAGI is your typical Adjusted Gross Income (AGI), plus any tax exempt income (i.e. municipal bond interest). For individuals with higher incomes, the Part B premium is a graduated premium based upon MAGI.
Just one example, a married couple with a Modified Adjustable Income (MAGI) between $170k and $214k per year, premiums in 2016 will jump to $223.00 per person, which is more than double the rate for married couples making below these amounts.
For wealthier couples with MAGI’s over $428k, the premium jumps to $509.80 per person. So for tax planning, the strategy is to keep MAGI as low, or as even as possible. For example, you might want to think twice about selling assets with a large capital gain in a single year, as this may create a huge spike in your MAGI. Perhaps you might want to spread the sale over many years.