Tax Planning in Down Markets

Well, investors aren’t going to have a very good weekend.  Many are losing net worth, and fear of the real economic effects of a major national or international event, such as the looming possibility of a coronavirus pandemic, is not a topic that anyone likes to deal with.  We have seen these kinds of events precipitate market crashes several times in the past few decades.  September 11th,  the invasion of Iraq and the 2008 melt down of the mortgage and financial markets, to name a few.  Big news events happen and the markets take a dive.  The savvy tax planner can make lemonade from the lemons now presented to them by shifting away from only conversations about investors fears and adding tax planning opportunities to lessen the panic.  Of course, the type of accounts investors are using will dictate whether any tax events will take place outside of the investor’s control.  For instance, mutual fund owners may be in for some ugly surprises in 2021, after this latest fear event is hopefully almost forgotten, as other peoples’ redemptions happening now in fear will give them (the people who did not sell), tax bills.  What’s the solution to that?  Perhaps selling now, even if you’re a buy and hold type passive investor, then buying (same day) the equivalent ETF.  No 30 day rule with this tactic, and you won’t be holding the mutual fund in 2021, when the surprise packages go out.  Mutual funds have their place in investing, but within IRAs, they don’t cause the negative tax results that they can cause in non-qualified or “regular investment” accounts. Another option, anticipating an unwanted surprise gain, is selling an over-concentrated stock now (30 day rule would apply).  But since there appears to be a good chance that the stock you sold will not have bounced all the way back in 30 days, you could buy an option, if it makes you feel better.   This is just one small example set.  There are many other possible options available in the tax planning world, and in a down market a tax planning review can add value and also calm fears.  Planners should be meeting with clients now to consider options that are appropriate for their situation, so if you are using a financial planner that says “I don’t give tax advice,” search out another planner that does and get a second opinion.

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