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Financial Advisors in Mercer Island, WA

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Tax Planning During Volatile Markets

December 1, 2020 By Paracle

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.

DISCLAIMER: THIS ARTICLE HAS BEEN PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSIDERED AS INVESTMENT ADVICE OR AS A RECOMMENDATION. THIS MATERIAL PROVIDES GENERAL INFORMATION ONLY. PARACLE ADVISORS DOES NOT OFFER LEGAL OR TAX ADVICE. ONLY PRIVATE LEGAL COUNSEL MAY RECOMMEND THE APPLICATION OF THIS GENERAL INFORMATION TO ANY PARTICULAR SITUATION OR PREPARE AN INSTRUMENT CHOSEN TO IMPLEMENT THE DESIGN DISCUSSED HEREIN. CIRCULAR 230 NOTICE: TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE IRS, THIS NOTICE IS TO INFORM YOU THAT ANY TAX ADVICE INCLUDED IN THIS COMMUNICATION, INCLUDING ANY ATTACHMENTS, IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING ANY FEDERAL TAX PENALTY OR PROMOTING, MARKETING, OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER. PARACLE ADVISORS IS AN INVESTMENT ADVISOR REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION.

Filed Under: Financial Planning, Planning Perspectives, Tax Planning Tagged With: tax planning, volatile markets

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