Smart Tax Planning Moves To Consider Before Year-End & BEFORE GOING ON SABBATICAL - Middleton & Company (2024)

• What do we mean? Tax loss harvesting is when you sell some investments that are currently at a loss to offset gains you’ve already realized this year when you sold investments at a profit.
• Why would you do this? You only pay taxes on your net gain (the amount you’ve gained minus the amount you lost), so the goal is to get as close to $0 in capital gains as possible
• How do you do it? Sell the investment that is at a loss this year, and then you can purchase a similar (but not identical) investment in its place. For example, you sell an international position and purchase a different international position (same asset class, but not “substantially identical”) OR you can buy back the same investment you sold, but you MUST WAIT 30 days after the original sale date to avoid a wash sale
• Pro tip: You can also take up to $3,000 in loss if there are no gains to offset (for individuals and married filing jointly) or $1,500 (for married filing separately), so we try to take all the losses we can to offset realized gains, plus any additional loss up to $3,000.
• NOTE: TAX LOSS HARVESTING IS ONLY APPLICABLE TO AFTER-TAX ACCOUNTS – WE DON’T DO THIS IN ROTHS, IRAS, OR ANY OTHER TAX-ADVANTAGED ACCOUNTS
• How does it relate to sabbatical planning?

• • It could be a good opportunity to reduce the risk in your account if you plan on using the money to fund your sabbatical within the next 5 years
  • It could be a good time to take some long-term capital gains in an employer stock purchase plan and offset the gains with short-term losses in another account
  • After-tax accounts are typically accounts that can be used to fund sabbaticals because there are no penalties for using the money before age 59 1/2 (like there are in IRA or 401(k) money)

• What do we mean? Selling investments in an after-tax account that are currently at a gain means that you pay tax on the gains in the current tax year. You pay tax on the difference between your cost basis and the proceeds from the sale.
  
• Why would you do this?
  • You have a large, concentrated position in a single stock (for example, your company stock) and you want to sell some of the position to reinvest in a more diversified portfolio
  • You know that you plan to use the money in the account in the short-term, so you want to make the cash available for when you need it
  • You want to take advantage of your current tax bracket
• How do you do it? Determine how much gain you are willing to take (i.e. how much tax are you okay with paying) and sell enough of the investment to generate that amount of capital gains. For example, if I am in the 15% capital gains tax bracket and my gain is $100, I would pay $15 in taxes ($100 x .15 = $15).
• Pro tip: Keep in mind that mutual funds and ETFs can have capital distributions that are outside of your control, so give yourself an extra cushion in case your income is higher than your calculations
• NOTE: CAPITAL GAIN GENERATION IS ONLY APPLICABLE TO AFTER-TAX ACCOUNTS – WE DON’T DO THIS IN ROTHS, IRAS, OR ANY OTHER TAX-ADVANTAGED ACCOUNTS
• How does it relate to sabbatical planning? Same as tax-loss harvesting:
  • It could be a good opportunity to reduce the risk in your account if you plan on using the money in the account to fund your sabbatical within the next 5 years
  • It could be a good time to take some long-term gains in an employer stock purchase plan and offset the gains with short-term losses in another account
  • After-tax accounts are typically accounts that can be used to fund sabbaticals because there are no penalties for using the money before age 59 1/2 (like there are in IRA or 401(k) money)

• What do we mean? Roth Conversions are when you “convert” assets from a Traditional IRA (pre-tax money) to a Roth IRA (post-tax money) so that your money grows tax free going forward. You pay tax on the amount converted at your current tax rate.
• Why would you do this? Conversions generate taxable income in the year of conversion, which may be advantageous if you have had a significant decrease in income this year relative to previous or future years.
• How do you do it? Determine how much ordinary income you want to generate for this tax year (or go the opposite direction and determine how much tax you are willing to pay) and select the growth-oriented or income-generating investments to convert.
• Pro tip: When we do conversions for our clients, we often convert securities in-kind rather than cash, and clients pay the tax out of pocket so that the full tax-advantaged amount stays intact rather than going to pay the tax.
• How does it relate to sabbatical planning?
  • We help clients do Roth conversions during their sabbatical year(s) that they have lower or no income to maximize their lower tax bracket
  • If you plan to use the converted money to fund a portion of your sabbatical, the converted money is subject to the 5-Year Rule, so planning ahead is important

When planning smartly, you can plan your sabbatical to take advantage of more than one tax year!

The end of the year is a great time to assess your current situation, make moves and plan your next year strategically.

We know seeing the whole financial picture can seem tricky, but it doesn’t have to be! It can actually be very empowering.

We’re here to help! If you’re interested in being guided by experts, contact us today by email at clientservices@middletonand.co or schedule a free discovery call.