Coronavirus Tax Opportunity (4/3/2020)

The coronavirus is not only a serious health scare, it is also a serious financial crisis. Businesses are being forced to shut down and people are losing their income. The stock markets are reacting negatively as expected. While taking losses in our equity portfolio is never a good thing, it does present an opportunity to reduce taxes this year and into the future.

Coronavirus Tax Opportunity

The coronavirus is not only a serious health scare, it is also a serious financial crisis. Businesses are being forced to shut down and people are losing their income. The stock markets are reacting negatively as expected. While taking losses in our equity portfolio is never a good thing, it does present an opportunity to reduce taxes this year and into the future.

The process is called “tax-loss harvesting”. To explain how it works, I should start by defining a few terms:

  • Tax-loss harvesting – A process of selling an asset at a loss and then buying a similar asset at a lower cost basis.
  • Cost basis – The price you paid for an asset. In the case of mutual funds, the cost basis is adjusted upwards when dividends and interest are used to buy additional shares.
  • Wash Rule – When you sell an asset at a loss, you have to wait 30 days before buying the asset back. If you buy the asset before the 30-day waiting period, it is called a wash sale and you can’t claim the tax-loss.
  • Similar Asset – An asset that has the same characteristics as the one you sold but is sufficiently different so you do not run afoul of the wash rule. For example, selling one large cap growth fund and buying a different large cap growth fund.
  • Carry-Forward – You can use the losses incurred when you sell an asset to off-set capital gains and up to $3000 of ordinary income. If you don’t use all those losses in the first year, you can “carry them forward” and use them in future years.

During periods when the investment markets are losing value, we use this opportunity to look at all our client’s portfolios to find assets that we can sell at a loss. However, for reasons I’ve stated in previous articles, we don’t want to be out of the market. It is important to stay invested during turbulent times to capture the up days. So, rather than just sell to realize a tax-loss, we immediately buy a similar investment. That way we are able to help our clients reduce their future taxes, stay invested in the markets and avoid the wash rule.

It can be hard to find the “silver lining” when our investments are losing value and sometimes that lining doesn’t shine brightly. However, by looking for tax losses to harvest and doing that correctly, we can use this opportunity to ease future tax burdens.

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Financial Satisfaction Survey

 


Directions: The statements below will help you to think about and assess how satisfied you are with many aspects of your financial life. Indicate your level of satisfaction for each statement with stars.
(1 star = "Not Satisfied", 3 stars = "Moderately Satisfied", 5 stars = "Very Satisfied")

I am satisfied with...

1. ...with my ability to meet my financial obligations

2. ...with the income my current job or career provides me.

3. ...with my spending habits.

4. ...with the level of debt I carry.

5. ...with the “extras” that I am able to buy for myself and/or loved ones.

6. ...with the level and quality of insurance protection I currently have.

7. ...with the amount of money that I save and invest on a regular basis.

8. ...with my current investment choices.

9. ...that I am on track to build a sufficient retirement nest egg.

10. ...with the level of employee benefits I receive.

11. ...with my style of personal bookkeeping and financial record management.

12. ...with my ability to provide financial help to family members.

13. ...with my estate plan.

14. ...with my level of charitable giving.

15. ...with the level of financial education I have attained.

16. ...with how I respond emotionally to my personal finance issues.

17. ...with my ability to communicate about my financial matters.

18. ...with the feelings I have about my money life.

19. ...that financial issues do not cause stress or strain in the relationships that are important to me.

20. ...with the working relationships I have with my financial service providers (i.e., insurance agent, banker, broker, financial planner, accountant).


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Directions: In each section, select the transitions that you are currently experiencing and those you are likely to experience in the future. In addition, check transitions in the short to mid-term and long-term columns that you either hope to experience or anticipate with concern.

Work Life Transitions

1. Change in career path:

2. New Job:

3. Promotion

4. Job loss

5. Job restructure

6. Education / retraining

7. Sell or close business

8. Transfer family business

9. Gain a business partner:

10. Lose a business partner:

11. Downshift / simplify work life

12. Sabbatical / leave of absence

13. Start or purchase a business

14. Retire:

15. Phase into retirement

16. Other


Financial Life Transitions

1. Purchase a home:

2. Sell a home:

3. Relocate:

4. Purchase a vacation home / timeshare:

5. Re-evaluate investment philosophy:

6. Experience investment gain:

7. Experience investment loss:

8. Debt concerns:

9. Consider investment opportunity:

10. Receive inheritance or financial windfall:

11. Sell assets:

12. Other:


Family Life Transitions

1. Change in marital status (marriage):

2. Change in marital status (divorce):

3. Change in marital status (widowhood):

4. Expecting or adopting a child:

5. Hire child care:

6. Child entering adolescence:

7. Child with special needs:

8. Child w/pre-college expenses:

9. Child going to college:

10. Child getting married:

11. Empty nest:

12. Family special event (Bat/Bar Mitzvah, anniversary party, trip):

13. Helping and/or gifting grandchildren

14. Concern about aging parent

15. Concern about health of spouse/partner or child:


Legacy Life Transitions

1. Increase charitable giving:

2. Give special financial gifts to children/grandchildren:

3. Give parental pension (monthly stipend):


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