With the probability of tax hikes in all categories in the near future, many clients voice concerns over planning strategies in this type of rising tax environment. Specifically, they ask, “What are some sound strategies for a rising tax environment that can be implemented before the end of 2021 to minimize tax liability and sure up long-term financial wellness?”
Strategy 1: Adjust Asset Allocation
The first suggestion is to adjust asset allocation for taxes. Remember to consider taxes as a factor in asset allocation, not make it the driving consideration. Overall, net investment return is still the factor that matters most and leaning too heavily on tax consequences could result in missing earning opportunities.
Strategy 2: Tax Loss Harvesting
Tax loss harvesting is a common strategy recommended in most year-end planning guides. This will be even more prevalent with rising income tax rates. Tax-loss harvesting is the selling of securities at a loss to offset a capital gains tax liability. Tax loss harvesting is not a permanent tax avoidance but rather tax deferral strategy. The proceeds will be reinvested and eventually taxed.
As with any investing strategy, there are rules to keep in mind, namely the wash sale rules, which prevent you from repurchasing a similar security within 30 days of selling at a loss.
Strategy 3: Contribute to Tax Efficient Accounts
When taxes rise, contribute to tax efficient accounts such as IRAs, 401(k)s, 403(b)s, 457 plans or other plans and life insurance. They all have tax deferred or tax-free aspects to their tax treatment.
During these hard economic times, be careful with the type of strategies that you implement. Include a knowledgeable tax advisor as part of your overall estate planning and retirement planning team. Plans should cover a long-time horizon not short term. Start by contacting the estate planning attorneys at Stouffer Legal in the Greater Baltimore area. They will help you build a team of advisors to help your through these challenging and unpredictable times. You can schedule an appointment by calling us at (443) 470-3599, emailing us at office@stoufferlegal.com, or register for an upcoming free webinar using the link below:
https://attendee.gotowebinar.com/register/4535033983774254351
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