By Jeffrey C. Deloglos, Trust Officer, ESSA Bank & Trust
As seen in Lehigh Valley Business
Year-end conversations with friends and family often remind us of last-minute items we need to complete to close out the year. We should also have a year-end planning conversation with our tax adviser.
When families have gathered, financial and estate planning tasks can be easily accomplished as many signatories are present and logistical challenges are overcome. If parents are in the retirement phase, it may be time to review their original wealth-transfer plans in greater detail as a family.
One goal is to confirm there are still sought-after tax advantages as proposed new codes are considered. Reviewing beneficiary designations and legal documents for out-of-date language is also a best practice.
Family gatherings are good for strategies and general conversations about legacy transfers and other current fiscal issues.
Sure to top the list is the proposed changes to our tax code. As of late November, there are three official proposals and a variety of modified alternatives making their way through legislation.
Keep a close eye on changes affecting tax harvesting and the capital gains rates. The proposals suggest no changes to capital gains would occur in the near future, but strategic tax-loss harvesting discussions are an important year-end priority.
MINIMIZING TAX LIABILITY
Tax-loss harvesting is effective at minimizing tax liability on sales of appreciated assets.
Realized gains are offset by losses on the sale of assets that have depreciated in value. By selling investments that have declined below their purchase price, a tax loss is generated, and that loss can be used to offset other taxable items, thus lowering your taxes.
Because there is no limit on the amount of capital losses that can be applied to capital gains, tax harvesting may provide a huge opportunity to reduce tax liability. If an investment that you have held for more than 30 days has lost value, but others have become big winners, a sale to offset gains with losses may be prudent.
RULES TO PONDER
It is important to keep this in perspective of your overall investment strategy and portfolio design. This strategy can be tricky, so always consult a tax professional before embarking on this strategy.
Tax professionals are up-to-date on all of the rules to consider:
PART OF AN OVERALL PLAN
Managing gains and losses each year should be a part of the overall strategy in nonretirement accounts. Consider working closely with a licensed tax professional and a financial adviser.
When done correctly, tax loss harvesting and portfolio rebalancing can work well together.