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)