A looming recession and extended periods of market volatility can be worrisome to any investor. However, times of stress can also inspire us to look for opportunities in areas where we can have greater control. Proactive tax mitigation is one of those areas, and when done in close coordination with your team of advisors, those strategies can provide significant tax-savings during times when many asset classes are depressed.
Tax-loss harvesting, which is the selling of securities at a loss to offset capital gains tax due on the sale of other securities that have gone up in value, is among the most common solutions to make the most of any losses and can be applied across a variety of asset classes, not just equities. But there are a number of other strategies to consider, from IRA rollovers and Roth conversions to tax relief for communities that were impacted by Hurricane Ian.
Below are just a few tax mitigation strategies to consider during times of volatility:
- Exercising incentive stock options (ISOs) when values are down can potentially mitigate the alternative minimum tax (AMT) spread component. When exercising an ISO, AMT tax is paid on the difference between fair market value and the exercise price – the lower the value as of the exercise date, the lower the AMT impact on a taxpayer. This strategy can also apply to non-qualified stock options, but instead of AMT it would mitigate regular tax, which can result in significant savings.
- Did you underwithhold for 2022, but don’t want to pay an IRS penalty? You can roll over your IRA, withhold taxes, but then re-contribute the funds to a qualified retirement account within 60 days. This way, your nest egg is still intact, but you will have paid income taxes through the withholdings, which will be treated as if made ratably over the four quarters
- Consider a Roth conversion while portfolio income is low and value in IRA accounts are depressed. You will pay regular income taxes on the converted amount now, but a Roth IRA conversion will give you tax-free withdrawals in retirement, allowing time for your portfolio to recover.
- Qualified charitable distributions (QCDs) allow for the transfer of IRA distributions to qualified charities and can reduce the taxpayer’s adjusted gross income (AGI), which can result in lower income taxes due, as well as Medicare premiums.
- Gift assets to future generations while the valuations are low and lifetime exemptions are high. This opportunity may be fleeting, as the expanded exclusion amount is set to expire at the end of 2025.
- Finally, Hurricane Ian and its devastating impact has provided tax relief for Florida residents. This includes the ability to claim a casualty loss on your 2021 return.
Times of uncertainty present an opportunity to “control the controllables.” Thorough, timely, and informed tax strategies can help mitigate losses during volatile and recessionary periods. Work with your team of advisors to determine the best course of action for your situation.