As we approach the end of 2024, you likely will be reviewing your clients' portfolios and doing some year-end tax planning with them. It's been an interesting year in the markets, and this year's market activity will likely play into both conversations.
Here are some tax-smart year-end portfolio moves to consider, depending upon clients' particular situations.
1. Tax-Efficient Rebalancing
2024 has seen significant gains in some areas, but not across all individual stocks and market sectors. Additionally, it has been a good year for many fixed income investments in light of the Federal Reserve's recent interest rate cut.
As we approach year-end, some tax-efficient rebalancing and portfolio planning tools might include:
- Tax-loss and tax-gain harvesting
- Charitable giving
2. Tax-Loss and Tax-Gain Harvesting
While broad market indexes like the S&P 500 and the Dow Jones Industrial Average have reached a number of highs this year, returns for stocks and asset classes have varied widely. Clients might have positions in their taxable accounts with both unrealized capital gains and capital losses.
Tax-loss harvesting can be an important tool to offset taxes on realized capital gains. Tax losses can be harvested in the course of rebalancing a portfolio and by selling holdings with unrealized losses that may no longer fit a client's investing strategy. Tax losses are first used to offset gains; up to $3,000 in losses can be used to offset other income. If a client has excess realized losses left, they can be carried forward to subsequent tax years.
Beware the Wash Sale Rule
It's important to be sure that clients don't inadvertently violate the wash sale rule as it pertains to tax-loss harvesting and lose out on the ability to use some or all of their harvested tax losses.
The wash sale rule says that in 30 days before or after selling a holding at a loss, the investor cannot purchase the identical or a substantially identical security. This 61-day spread, including the day of the transaction, includes transactions in individual retirement accounts and 401(k)s, in addition to clients' taxable brokerage accounts.
Two areas that cannot be overlooked in avoiding the wash sale rule are:
- Stock grants from a client's employer. If clients sold shares of their employer's stock at a loss, it's important to ensure that they will not receive stock grants from their employer within the wash sale time period.
- Dividend reinvestment programs. These may be overlooked if a portion of a position is sold at a loss. Receiving dividends through this type of arrangement can cause a violation of the wash sale rule.
Harvesting Taxable Gains
Tax-gain harvesting, meanwhile, can also be a strategic tool for some clients, especially if they find themselves with a lower than normal tax rate in a given year or if they expect their tax bill to increase in coming years.
Tax-gain harvesting is selling holdings that have a gain but might not fit with a client's ongoing investment strategy. It can also be part of the rebalancing process or more generally to align a client's portfolio with financial planning priorities going forward.
3. Gifting Appreciated Shares
Using appreciated shares of individual stocks, exchange-traded funds or mutual funds can be a tax-smart portfolio move for clients who are charitably inclined.
Appreciated shares may need to be reduced as part of portfolio rebalancing efforts, and gifting some or all of these shares to charity is a tax-efficient way to accomplish this. This removes them from a client's portfolio, while the market value of the shares can be used as a charitable deduction, assuming the client can itemize deductions on that year's tax return.
