As 2019 winds to a close, it’s important for advisors to take a closer look at where clients
are likely to end the year from a tax
perspective. While this time of year can
be a busy one for advisors and clients
alike, it’s important to evaluate now. You
won’t be able to take advantage of these
opportunities after Dec. 31.
1. Harvesting Capital Losses
Hopefully, at least once a year, you are
running unrealized gain and loss reports
for your clients to determine whether
there are positions that can be sold at a
loss and replaced with appropriate holdings to capture the loss for tax purposes.
Each dollar of capital loss often represents a 15% tax savings as most people
fall into a 15% capital gains bracket. For
some, it may represent an 18.8%, 20%,
23.8%, or more depending on the interactions with the net investment income
tax and other income streams.
2. Harvesting Capital Gains
You’re probably running reports from
custodians or different insurance companies to make sure the required minimum distributions have been taken.
Most likely you also are running realized
gain and loss reports, since harvesting
capital losses for most clients is going to
be an annual consideration.
However, harvesting capital gains
can be a good option for some clients
who fall in the 0% capital gains bracket,
resulting in a free step up in basis. This
situation is often present for those who
are between early retirement and age 70
1/2. Sometimes it can make sense to harvest capital gains up to around $100,000
if you can keep all the other ordinary
income off the table.
3. Minding Pass-Through Gains
(Phantom Capital Gains)
Around this time of year, mutual fund
companies start to publish estimates of
capital gains that have been realized in
their funds and will need to be passed
through to then-current shareholders.
Along with the estimated percentage of
capital gains, the companies generally
also will post a date of record. If you
hold the fund as of that date, you will
receive a 1099 representing your pro-rata share of the gains recognized inside
Advisors should consider whether
the phantom capital gain is greater than
the gain that would be recognized if
the position were sold. If the phantom
capital gain is greater, then you have the
opportunity to sell and reinvest into a
more tax-efficient vehicle. Exchange-traded funds and some tax-efficient
mutual funds may be options. If the
client’s situation warrants, tax-deferred
vehicles, such as annuities or life insurance, also could be considered.
4. Roth Conversions
In other circumstances you might be
looking for Roth conversions. Sometimes
those Roth conversions actually can be
free. You can take that Roth conver-
sion up to the beginning of the 10% tax
bracket and occasionally you might not
have any other ordinary income. So, get-
ting $10,000 or $15,000 out of an IRA
with zero tax bill is a real opportunity. In
other circumstances you might be able
to convert right up to the point where
you start to get the Social Security tax
torpedo or maybe just to the edge of a
Medicare premium threshold.
THE HIDDEN VALUE
Doing all the above will add enormous
value to your clients, but presenting
these opportunities also can help you
grow your financial planning practice.
You can do this by effectively communicating the value that this tax-efficient retirement advice adds. Clearly
show your clients your value as an
advisor by taking advantage of these
opportunities to add dollars to their
Joe Elsasser, CFP, RHU, REBC, founded
Covisum, a financial tech company focused on
creating a shared vision throughout the financial planning process. He developed his Social
Security Timing software in 2010 because, as
a practicing advisor, he couldn’t find a Social
Security tool that would help his clients make the
best decision about when to elect their benefits.
By Joe Elsasser
Year-End Tax Opportunities to Leverage
It’s time to consider Roth conversions and harvest some losses and gains.