What It Is: Tax-loss harvesting involves selling investments that have declined in value to offset capital gains from other investments.
If your losses exceed your gains, you can use up to $3,000 per year to offset ordinary income, with additional losses carried forward to future years.
Why It Helps: This strategy reduces your taxable income and can lower your overall tax bill, particularly in years when you have significant capital gains.
How to Implement: Regularly review your portfolio for opportunities to sell underperforming investments. Be mindful of the “wash sale” rule, which disallows the deduction if you buy the same or a substantially identical security within 30 days before or after the sale.
2. Gifting Appreciated Securities
What It Is: Instead of donating cash, you can gift appreciated securities, such as stocks or mutual funds, to a charitable organization.
Why It Helps: By donating appreciated securities, you avoid paying capital gains taxes on the appreciation, and you may also receive a charitable deduction for the full market value of the asset. This strategy is particularly effective if the securities have been held for more than one year, qualifying them for long-term capital gains treatment.
How to Implement: Work with your financial advisor or the charity to transfer the securities directly to the organization. Ensure that the charity can accept securities as a donation.
3. Donor-Advised Funds (DAFs)
What It Is: A Donor-Advised Fund allows you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants to charities over time.
Why It Helps: You can donate appreciated securities to a DAF, avoiding capital gains taxes and taking an immediate tax deduction. This is a good option for those who want to spread out their charitable giving over several years.
How to Implement: Establish a DAF through a financial institution or a charitable organization. You can contribute cash or appreciated assets, and then decide how and when to distribute the funds to your chosen charities.
4. Strategic Charitable Giving
Qualified Charitable Distributions (QCDs):
What It Is: QCDs allow individuals over 70½ to donate up to $100,000 per year directly from their IRA to a qualified charity.
Why It Helps: QCDs count toward your Required Minimum Distributions (RMDs) but are not included in your taxable income. This can reduce your overall tax burden, especially if you don’t itemize deductions.
How to Implement: Direct your IRA custodian to transfer the funds directly to the charity. Ensure that the distribution meets the QCD requirements to avoid it being treated as a taxable distribution.
5. Strategic Use of Roth Conversions
What It Is: Converting assets from a Traditional IRA to a Roth IRA involves paying taxes on the converted amount now, but future withdrawals from the Roth IRA will be tax-free.
Why It Helps: Roth conversions can be particularly beneficial if you expect to be in a higher tax bracket in retirement or if you believe tax rates will increase in the future. Converting during a year when your income is low or during a market downturn can reduce the tax impact.
How to Implement: Consider spreading the conversion over several years to avoid moving into a higher tax bracket. Work with a tax professional to determine the optimal timing and amount for your conversion.
Leave a Reply