"You better watch out and you better not cry, you better not pout, I’m tellin’ you why…"
Yes, Santa Claus is coming to town, but so are President Biden’s tax changes. So far, an increase in income and capital gains tax rates seems unlikely next year according to Barrons.com. Biden’s plan to raise top rates on gains and income has not gotten enough support. Despite the uncertainty, here is a quick list of what can be done in the next 30 days to prepare.
Minimize Capital Gains. It may be hard to harvest losses for 2021, but it is worth a look to review your portfolio and see where capital gains could be offset by capital losses. Some sectors where losses may be captured are in biotechnology, online retail, solar stocks, and gold. If you happen to own some of these sectors and have unrealized losses, those losses can be realized and used to offset capital gains in other areas of your portfolio.
Utilize Opportunity Zones. You can consider deferring capital gains by investing in opportunity zones. Beginning in 2018 investors began accessing this program. You can reinvest your capital gains into one or more of the 8700 opportunity zone locations within the US. These are typically low-income areas in need of economic stimulus. When choosing this investment, it allows for the cost basis on reinvested capital gains to be stepped up by 10% when the investment is held for 5 years. After 10 years all capital gains become exempt from taxes. (FYI The 10% step up in basis after 5 years will expire this year.)
Roth IRA conversion. If you find yourself in a lower-than-normal income year, a Roth conversion may be a great option. Or, if you have been considering a Roth conversion it may be worth doing now rather than waiting for tax rates to increase. A Roth conversion allows you to convert your IRA funds into a Roth IRA. In the year you decide to do this, the entire amount converted is taxed at ordinary income tax rates. This means you pay the tax now, then the funds grow tax free and can be withdrawn tax free in future years. (As a reminder, funds within an IRA grow tax deferred and are taxed at ordinary income tax rates upon withdrawal.)
Charitable giving. A great way to manage large gains is to donate some of your highly appreciated stock to a charity. You get a tax deduction for the market value of the shares, no tax is owed on any capital gains, and the charity can sell the stock without triggering any tax. A win-win.
Cash gifts to a charity. This year is the last year to deduct cash gifts to charities even when you are claiming the standard deduction. The limits are a $300 deduction for singles and $600 for couples. This is a no-brainer. Why not give funds to a worthy cause rather than paying the IRS? If you do itemize your deductions this is the last year that cash gifts to charity will be 100% deductible. Normally only 60% of cash gifts are deductible. It may be worth a look, especially if you wanted to make a large donation or perhaps even combined two years’ worth of donations into this year. Keep in mind, to take advantage of this perk you must itemize deductions and be able to exceed the standard deduction limits. For 2022 the standard deduction amounts are still rather high, $12,550 for singles and $25,100 for couples. Also, as required minimum distributions for IRA's are back this year, you can offset the tax if you gift part or all of it directly to a charity.
Please feel free to reach out to us regarding any of these topics. We typically review the capital gains status for our clients in the coming weeks. We also have resources regarding how to access Opportunity Zone investments. We can help with Roth conversions and can assist in making charitable donations of stock or cash. We are here to help!