It is no secret that the first three months of 2022 were a bit tumultuous in the financial markets.
Stock traders responded to the uncertainty surrounding the invasion of Ukraine by selling. Bond traders responded to the uncertainty surrounding the Federal Reserve’s battle with inflation by selling. About the only strategies that had a positive first quarter were trend-followers that profited from rising commodity prices and bond yields.
Having faithfully guided our clients through the last 37 years, we have seen and survived such quarters before. We also know that such broadly negative quarters can present our clients with an opportunity that we call Tax Reduction Trading™ (TRT). We use TRT during market downturns to potentially reduce your future capital gain and income tax liabilities.
By selling investments in a nonretirement account that have gone down in value since you purchased them, we can create what the IRS calls “realized losses.”
We then use these sale proceeds to purchase a similar investment to maintain the integrity of your portfolio and retain your upside potential if the markets turn around.
Most importantly, we are not “selling low” motivated by misguided fear — we are simply replacing one investment with another for tax benefits.
The IRS permits you to use any realized losses to reduce your taxable income. While you may offset an unlimited amount of capital gains every year using your realized losses, the IRS only permits you to offset up to $3,000 of taxable income per tax year.
The good news is that any realized losses that you do not use in the current tax year may be carried forward to future tax years indefinitely.
There are two key criteria that must be met to claim realized losses:
- If you purchase or sell the same investment within 31 days in any of your accounts (retirement or nonretirement), the IRS will disallow your tax benefits due to their strangely titled “wash sale” rules.
- The investment that you purchase with the sales proceeds cannot be identical to the investment you sold. Some investments with different names invest identically, so you must be careful.
Over the next two weeks we will be conducting our usual quarterly individual review of our clients’ Strategic Wealth Management accounts. Given how the first quarter went, we are anticipating that many of our clients will likely benefit from some Tax Reduction Trading™ this quarter, so you may see an above average number of adjustments in your portfolio as we work to reduce your future tax liabilities while maintaining your long-term investment risk budget.
You won’t see the real benefits of our TRT work this quarter until you file your 2022 tax returns in almost an entire year. Thankfully, we persistently look for opportunities to reduce your overall tax burden throughout the year – not just around tax deadlines.
We welcome any questions you may have about our Tax Reduction Trading™ strategy, and we encourage you to consult with your tax professional for additional details as everyone’s tax situation is different.
Quote of the week: Chris Rock: “You don’t pay taxes – they take taxes.”
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Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through IAG Wealth Partners, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial. Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.