Market volatility occurs when we see meaningful price swings in either an up or down market. This can provide for unique tax planning opportunities. Below is a summary of some potential strategies to consider as we approach year end.
Portfolio Rebalancing
How it Works: Rebalancing is key to maintaining your long-term strategic investment allocation. As assets rise and fall in value, this strategy enforces the discipline of trimming asset categories that have done well and adding to categories that are experiencing underperformance.
Planning Tip: Rebalancing during volatile markets and maintaining your long-term allocation helps remove some of the emotional response you may feel during times of uncertainty.
Benefit: Rebalancing can help produce value from market volatility over the long term. As mentioned above, trimming from categories that have done well and repositioning into categories that are underperforming enforces the positive behaviors of a long-term investor.
Reducing Concentrated Stock Positions
How it Works: Consider reducing exposure to concentrated stock positions and reinvesting in the broader market. This is especially important if your position has experienced a meaningful increase in value. This strategy should be combined with the broader portfolio rebalancing strategy mentioned above.
Planning Tip: We encourage incorporating a strategy to reduce concentrated equity as part of your long-term plan. Having a plan in place helps to remove some of the emotion that can come from diversifying a concentrated stock position. Gains from selling concentrated positions that have appreciated significantly may be offset by tax loss harvesting accomplished earlier in the year when markets were down.
Benefit: Diversification helps to reduce company specific risk from your portfolio.
Charitable Gifting
How it Works: Gifts to non-profits create tax advantages. Some specific strategies can help maximize your tax savings.
Planning Tips:
- Donate long-term appreciated securities rather than selling them and then donating the proceeds. This will allow you to donate and deduct the full value of the investment without paying capital gains tax. On the other hand, shares that have lost value should be sold before donating them to allow you to record a capital loss, reducing your taxable income.
- Set up a Donor Advised Fund (DAF): Also known as a Charitable Gift Fund, a DAF is a simple and inexpensive option for gifting highly appreciated securities. Contributions to a DAF create an immediate tax deduction.
- Bundle your deductions: With the increase in the standard deduction to $24K (for married taxpayers) and $12K (for single taxpayers), bundling your deductions may help reduce your tax bill. For example, making a large donation in one year instead of annual small donations may enable you to receive a greater tax benefit.
- Donate your IRA RMD directly to charity: After reaching age 72, IRA owners must take an annual Required Minimum Distribution (RMD) from their account. By donating that RMD amount directly to charity, you can exclude that money from your taxable income.
Benefit: Charitable gifting is a great way to reduce your tax bill while simultaneously meeting your personal charitable goals.
Finding the Best Tax Planning Strategies for You
Tax planning strategies are unique to each family. It is important to coordinate with both your Paracle Advisor and tax advisor. We encourage you to explore these opportunities with your Paracle team to see what potential tax strategies are right for you.
About Paracle
Paracle Personal Financial Management is an independent financial planning firm founded in 2004 with an honest desire to help people optimize their finances by providing unbiased financial planning and investment advice that puts their clients first. Paracle specializes in delivering expert, comprehensive wealth management services to busy families. Their expertise integrates financial planning with investment management to ensure their clients experience confidence in every aspect of their plan so they can focus on what matters most. To learn more about Paracle, connect with them on LinkedIn.
