Jul 5, 2022
Income tax planning in challenging environments
Inflation is the highest in decades. Interest rates are rising. Markets have struggled (to say the least) through the first half of 2022. Your options include:
- Ignoring: Curl up into a ball and wait until things get better
- Running: It can’t be too long before there are colonies on the moon and Mars.
- Acting: Engage in some planning steps and techniques that are tailor-made for the current environment.
There are several income tax planning and estate tax planning techniques that may put you in a better position as things eventually get back to ‘normal.’
In this article, we will explore income tax planning techniques you can incorporate into your planning.
Tax Loss Harvesting
Many have discussed the concept of tax loss harvesting over the last decade—which is taking advantage of losses in order to offset gains and ultimately resetting the basis of keep positions in the portfolio. The problem is that there haven’t been all that many losses to take to offset the tremendous gains—until now, that is. With the precipitous decline in markets over the first half of 2022, losses may now be available to utilize. This is not only a tax-efficient way to deal with large, embedded capital gains, but more importantly, an opportunity to rebalance and reduce the risk in a portfolio that may have become too dependent on sectors that have done well over the past decade.
Roth IRA Conversions
Although inflation, interest rates, and public markets may currently be headed in the wrong direction, the income tax rates enacted under the Tax Cuts and Jobs Act of 2017 still exist. These relatively low, income tax rates (compared to those proposed under the Build Back Better proposal) combined with lower stock prices may make this an excellent time to convert a traditional IRA to a Roth IRA by paying the tax now. The lower a) the value of assets in the traditional IRA and b) tax rates, the lower the cost to convert to a Roth IRA.
Charitable Remainder Trusts
In a typical charitable remainder trust (CRT), a person contributes appreciated property into the trust in exchange for a stream of payments, typically for his or her lifetime or for a set term of years. When that term ends, a charitable beneficiary receives what is left over (and a charitable deduction is allowed for that amount expected to pass to charity). While often considered in the estate planning context, CRTs are also useful as an income tax planning technique. Because the CRT itself is considered a charity, it can sell appreciated assets inside the trust without an immediate tax effect. The tax is instead paid over time, as payments are made to the non-charitable beneficiary. This process has the effect of tax deferral. For someone looking for a stream of income, higher interest rates create higher payouts to the non-charitable beneficiary. The classic use for a CRT would be the retiring executive who has a concentration of company stock for which he or she has very low or no basis. That person can contribute the company stock to the CRT, receive an income stream, and pay the capital gains tax overtime.
In our next installment, we’ll discuss tips for estate planning in challenging environments. For more information on Income Tax Planning strategies and how they may help you, please contact your CI Private Wealth Advisor.
ABOUT THE AUTHOR
Steve Novak, JD
Steve Novak serves as a Managing Director at RGT. He has spent the last twenty years advising wealthy individuals and family offices on estate, gift, and income tax planning matters. Most recently, Steve has been deeply involved in wealth education and family governance engagements.
Professionally, Steve has been recognized as one of the top attorneys in Dallas by *D Magazine from 2013 to 2018 and was also named a *Thompson Reuters “Super Lawyer” from 2014 to 2018. Steve was also named a *Texas Monthly “Rising Star” from 2006 to 2013.
Steve received his Juris Doctor degree and Bachelor of General Studies in Political Science from the University of Kansas. He has been involved in numerous professional and charitable organizations, including the Dallas Estate Planning Council, the Parkland Foundation Planned Giving Council, the SMU Planned Giving Board of Advisors, the Dallas Council on Charitable Gift Planners, and Campfire First Texas Council Board of Directors. Steve is also a frequent speaker on estate planning and charitable topics.
This information is for educational purposes and is not intended to provide, and should not be relied upon for, accounting, legal, tax, insurance, or investment advice. This does not constitute an offer to provide any services, nor a solicitation to purchase securities. The contents are not intended to be advice tailored to any particular person or situation. We believe the information provided is accurate and reliable, but do not warrant it as to completeness or accuracy. This information may include opinions or forecasts, including investment strategies and economic and market conditions; however, there is no guarantee that such opinions or forecasts will prove to be correct, and they also may change without notice. We encourage you to speak with a qualified professional regarding your scenario and the then-current applicable laws and rules.
Different types of investments involve degrees of risk. Future performance of any investment or wealth management strategy, including those recommended by us, may not be profitable, suitable, or prove successful. Past performance is not indicative of future results. One cannot invest directly in an index or benchmark, and those do not reflect the deduction of various fees which would diminish results. Any index or benchmark performance figures are for comparison purposes only, and client account holdings will not directly correspond to any such data.
Our clients must, in writing, advise us of personal, financial, or investment objective changes and any restrictions desired on our services so that we may re-evaluate any previous recommendations and adjust our advisory services as needed. For current clients, please advise us immediately if you are not receiving monthly account statements from your custodian. We encourage you to compare your custodial statements to any information we provide to you.