Feast or Famine
US investors got to take a much-needed break this past week to spend time away from following the developments in the markets and making memories (hopefully good ones!) with their families. The year is quickly coming to a close, and as we weigh options for minimizing taxes for our portfolios, it has become very apparent that the opportunities to take losses in 2019 have been greatly diminished due to the strong performance in most major asset classes. The below chart highlights some of the more prominent markets.
As the chart above demonstrates, this year has been a complete reversal of fortunes for investors compared to last year. While it was hard to find a segment of the market that was up in 2018, it is nearly impossible to find one that is down this year. This performance creates an interesting proposition for investors looking to harvest losses to reduce tax liabilities for this year potentially. While last year saw a veritable feast of opportunities to harvest losses for portfolios, this year has seen a famine as opportunities are now few and far between. But as much as investors may want to avoid paying unnecessary taxes to the government from capital gains, they like the prospect of losing money on their investments even less. When thinking about the relationship between portfolio performance and the potential for tax-loss harvesting, this chart helps describe the situation.
So if tax loss harvesting isn’t an option for investors, are there other ways to reduce tax-liability for 2019?
Absolutely. This year presents an excellent opportunity for investors that are charitably inclined to donate securities and potentially reduce their tax liability by gifting appreciated securities in the form of stocks, bonds, mutual funds, etc. The following graphic from Fidelity Charitable shows the impact of gifting securities versus a gift of cash.
Another common scenario that happens for investors that are age 70½ or older, IRS rules require you to take required minimum distributions (RMD’s) each year from your tax-deferred retirement accounts. This additional taxable income may push you into a higher tax bracket and may also reduce your eligibility for certain tax credits and deductions. To eliminate or minimize the impact of RMD income, charitably inclined investors may want to consider making a qualified charitable distribution (QCD). Below are a few examples of ways that investors can take advantage of QCD’s for year-end tax planning purposes.
These are just a few examples of how investors that are charitably inclined can take advantage of the current tax rules to potentially save on their yearly tax bill and benefit a charity they value. In this annual time of feasting and celebration, all of us need to recognize just how fortunate we are and reflect on what we can do with both our time and money to pay it forward this year.