‘Take lemons and make lemonade’ with tax-loss harvesting
With the S&P 500 index down nearly 20% for 2022 as of mid-day on Dec. 19, it may be a good time for tax-loss harvesting, which allows you to offset brokerage account profits with losses, Roberge said.
After reducing your 2022 investment gains, you can use additional losses to lower regular income by $3,000 and carry the remaining losses forward to future tax years.
Karen Van Voorhis, a CFP and director of financial planning at Daniel J. Galli & Associates in Norwell, Massachusetts, also suggested the strategy since “we haven’t seen losses like this in more than a decade.”
“Harvesting losses is an easy way to take lemons and make lemonade at the end of a less-than-optimal year for the stock market,” she said.
Consider a year-end Roth conversion
Another strategy to consider when the market dips is a Roth individual retirement account conversion, which moves pre-tax funds to a Roth IRA for future tax-free growth. You may, however, owe taxes on the converted amount.
There are two benefits of Roth conversions in a down market: you can buy more shares for the same dollar amount, and you may pay less taxes on the transferred portion.
Of course, you’ll want to know how the conversion affects your 2022 taxes because more adjusted gross income may trigger higher Medicare premiums, among other tax consequences.
But with the year nearly over, it’s easier to estimate 2022 income and see how the conversion may affect your taxes, said Kevin Burkle, a Jacksonville, Florida-based CFP and founder of HCP Wealth Planning.
‘Bunch’ multiple years of charitable giving with a donor-advised fund
With a higher standard deduction since 2018, you’re less likely to itemize deductions on your tax return — such as charitable gifts or medical expenses — making these tax breaks harder to claim.
The reason is that you choose the standard deduction or itemized deductions on your return, whichever is greater. For 2022, the standard deduction is $12,950 for individuals and $25,900 for married couples filing together.
One way to optimize charitable giving is to “bunch” multiple years of gifts into one through a so-called donor-advised fund, explained Philip Herzberg, a CFP and lead financial advisor at Team Hewins in Miami. The account acts like a charitable checkbook and offers an upfront deduction.
The best investments to give are “highly appreciated publicly-traded stocks,” he said. You’ll avoid the capital gains taxes you’d otherwise owe from selling, which reduces levies while “maximizing philanthropic impact,” he said.