This week on the Retirement Quick Tips Podcast, the theme is: your 2021 Year-End Tax Planning Checklist

Today, I’m talking about tax loss harvesting. Tax loss harvesting is using losses in a taxable account (i.e. not an IRA or 401k) to offset gains. This is a very popular strategy for reducing taxes, but it’s become less useful in recent years with the stock market marching higher and higher, you may not have any investments that have unrealized losses to offset your gains. 

But that’s ok, because there’s another worthwhile strategy to consider, and that is accelerating your realization of gains in 2021. I have a client who has own Microsoft stock for a very long time. His adjusted cost basis in the stock in less than $1 per share and it makes up more than 40% of his overall portfolio. We’ve gradually sold some over the years, but we haven’t been able to make much of a dent because the stock has had so much growth in recent years, and my client has been reluctant to sell because the taxes on his gains would give anyone a heart attack. 

But one consideration for certain clients would be to bit the tax bullet and sell part or all of highly appreciated assets in 2021. This strategy is worthwhile for a few reasons. 

1. Taxes on capital gains are pretty low right now. If your income is quite low, you’ll pay $0 in capital gains tax. But even assuming that you’ll have to pay tax on gains, I would rather do that at the 15% level vs. being taxed at my regular income tax bracket, which is what has been proposed many times. 
2. If your income was lower in 2021 than it will be in 2022, this would also be another reason to accelerate capital gains and pay the taxes now vs. in future years where your income could be higher. If you’re still may years from retirement, it’s better to accelerate gains because you likely are in a better position to pay the taxes compared to your future retired self.
3. One of the most beneficial aspects of how capital gains are taxed is that heirs currently get a step up in basis, meaning that an heir can sell a highly appreciated asset - whether that be a stock or a house - and the clock on those gains resets at the time of death when they inherit those assets. It’s a part of the tax code that’s currently on the chopping block. In a speech in April of this year, President Biden said: “ending the practice of ‘stepping-up’ the basis for gains in excess of $1 million ($2.5 million per couple) and making sure the gains are taxed if the property is not donated to charity.”

The bottom line here is that accelerating sales of assets into 2021 for the purpose of paying the taxes now make a lot of sense for certain people in certain situations. Most people won’t do a darn thing because they can’t swallow the tax bill now and would prefer to just kick the tax can down the road. If you do so, it’s potentially to your detriment later on if you know you’re going to need to or want to sell that asset - but you could do so at higher rates. 

As always, talk to your tax advisor - if they’re worth their salt, they will look at this issue from all sides to help you make an informed and prudent decision. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance