Are your investments showing an unrealized loss?  If so, here are three year-end planning moves to consider:

  • Tax loss harvesting. With the continued volatility and decline in stock prices and stock market indexes, taxpayers that invest regularly are most likely sitting on some “losers” in their taxable portfolio.  Before year-end, you should review your investments for marketable securities that show a current market value less than their cost basis, reflecting an unrealized loss.  Assuming you also have some “winners”, securities with a net unrealized appreciation in your portfolio, sell off some of your investment losses to recognize the capital losses.  Next, identify your “winners” in your taxable investment portfolio.  Those realized capital losses from sales will offset your realized capital gains from sales and you’d pay no taxes on the realized capital gains being offset.  If some of the “winners” just sold are securities you want to continue to hold in your portfolio, repurchase the security at the higher price, increasing your cost basis, thus, reducing the capital gain when sold again at a later date.  Wash sale rules only apply to sales of investments sold at a loss and repurchased within 30.  Repurchasing “winners” are not subject to wash sale rules.  Plus, up to $3,000 in net capital losses (capital losses in excess of capital gains) can offset your other ordinary income on your tax return annually and any excess net capital loss above the $3,000 threshold carries over to be used in the following year.  Meeting with your financial planner prior to year-end can help you strategize such moves to maximize your tax benefits and investment planning goals.
  • Roth conversions. If you’ve been considering converting your traditional IRA (funded with pre-tax contributions) to a Roth IRA, this may be the year to make that move.  A Roth conversion generates taxable income based upon the fair market value of the traditional IRA on the date of conversion.  If the value of your traditional IRA has dropped, converting now would result in a lesser tax burden than converting when the traditional IRA was at a higher fair market value.  And once in the Roth IRA, the future distributions and income generated will become tax free – while earnings are only tax deferred when the funds continue to be held in the traditional IRA.
  • Gifting to family. For the 2022 tax year, taxpayers are allowed to gift $16,000 annually to any other individual without reporting the gift to the IRS via a Gift Tax Return.  This amount is known as the “Annual Exclusion per Donee” and increases to $17,000 for 2023.  “Givers” can gift cash, as well as marketable securities to individual family members and others as they wish.  With the downturn in the investment markets, grandparents and parents have a few options to maximize the benefit of the gift when gifting an investment that has dropped in value.
    • Option 1 would be gifting of an investment that has decreased in value, below the cost basis. The giver could sell the shares, recognize a capital loss, and gift the cash from the sale.
    • Option 2 would be gifting of an investment that has decreased in value but with a current fair market value that remains above the cost basis. The giver could gift the shares of stock, at the fair market value as of the date of gift.  This form of gift would result in a larger number of shares of the investment being transferred to the receiver of the gift compared to when the number of shares that would have been given when the price per share of the investment was higher.  With the hope that gifted stock or mutual fund will again increase in value over time – in a year or two the gifted shares could be worth significantly more than the $16,000 value given at the time of the gift.