Strategies for Transforming Tax Savings into a Long-Term Approach Rather Than a Temporary Aim
In the world of financial planning, understanding the best strategies for minimizing tax liabilities can be crucial. Two such strategies that could prove beneficial for certain individuals are harvesting long-term capital gains and Roth conversions.
A 64-year-old business owner, for instance, who is winding down or selling their company and has a $3 million IRA, might find a Roth conversion particularly advantageous in a low-income year. This move could potentially avoid larger tax liabilities in the future.
However, it's important to note that the conversion itself could trigger significant tax implications. To mitigate this, strategically pairing the funding of a Donor-Advised Fund (DAF) with a Roth conversion could help neutralize some of these tax implications.
By doing both in the same year, you can reduce your taxable income while using the additional deductions to offset some of the tax liability, making at least some of your Roth conversion "tax-free."
The right time to harvest long-term capital gains may also be when you report little to no income. Selling unrealized long-term capital gains in a taxable account can trigger the long-term capital gain income threshold, which is $96,700 if filing jointly. In this case, the long-term capital gains rate is zero up to this income level for a married couple filing jointly.
Immediately buying back the sold assets increases the cost basis, eliminating up to $96,700 in taxable long-term capital gains when the assets are eventually sold for good. This strategy, known as "wash sale," can save money in the long run.
It's worth considering this strategy for those with a large percentage of their portfolio in a single company stock. Harvesting gains could be a consideration in such cases, especially if the individual is concerned about the potential volatility of that stock.
The information provided in this article is not investment, tax, or financial advice. Always consult with a licensed professional for advice concerning your specific situation.
David Eisenhauer, the founder and chief wealth strategist at Greykasell Wealth Strategies, emphasizes the importance of strategic tax planning. He is a member of Forbes Finance Council, an invitation-only organisation for executives in successful accounting, financial planning, and wealth management firms.
DAFs, such as those mentioned, allow for irrevocable contributions of cash or appreciated assets, with the donor claiming a tax deduction in the year of donation. The IRS allows up to 30% of adjusted gross income for tax deductions on appreciated assets donated to DAFs, and up to 60% for cash donations.
In conclusion, strategic tax planning can help individuals like the 64-year-old business owner mentioned earlier to make the most of their financial situation. While reducing current taxes may seem appealing, it's essential to consider the long-term implications of such decisions. Always consult with a financial advisor to ensure you're making the best decisions for your unique financial situation.
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