Updated January 2017 — For the savvy investor, now is the time to start planning for next year’s taxes —long before tax due dates roll around, not just at year end.
Strategic financial moves now and in the months ahead may help preserve assets, grow earnings, and even reduce tax liabilities when filing time arrives next spring. A good place to start, according to Bill Zeltner, Regional Wealth Planning Manager at Wells Fargo Private Bank, is with your portfolio: "A careful overview of all investment accounts may help you achieve a diversified portfolio while being tax-efficient at the same time."
Effective strategies year after year
Can last year's strategies be effective this year? Many can, says Zeltner, if major changes to tax policy did not go into play in time for tax filings. "But with a new President and Republican-controlled Congress, many people feel that there is potential for major tax reform in 2017. As of January 2017, no one knows exactly what reform will be enacted and when it will be effective. Investors should consider monitoring tax reform discussions and consulting with a tax professional to explore ways to readjust your strategy as changes are enacted. That consultation — even when there are no big changes on the horizon — can help you look for tactics to help improve your tax situation."
Zeltner says that any sound financial strategy should include a foundational block: tax-efficient investing. And that's not just about picking specific types of investments — it encompasses everything from understanding which investments to divest if you're selling to understanding the tax treatment of different types of accounts in which you may hold those investments.
Historically, conventional wisdom told us to invest in equities in our retirement accounts due to their long-term growth potential and because these funds are intended to be untouched for many years," says Zeltner. But with tax rates high right now, investors who have both taxable and tax-deferred retirement accounts may want to consult with their tax and investment advisors to determine whether it makes sense to place high income-producing securities in the tax-deferred accounts to potentially reduce tax paid on any interest.
"Conversely, for the taxable accounts, investors may want to consider investing more in tax-efficient investments such as stocks whose dividends are qualified and taxed at the lower capital gains rates."
Zeltner stresses the importance of the role of your tax professional in decision-making: "When exploring potential tax efficiencies within your overall wealth plan, involve your tax professional in discussions to provide guidance on strategies and their potential impact on your overall financial picture."
Choices in a volatile economy
Zeltner recommends developing a goals-based blueprint for your overall wealth plan. Focusing on what is most important to you can help your financial team give you the guidance you need to help make informed decisions during volatility cycles without derailing your long-term objectives. One key strategy is to watch for the potential dips during market fluctuations.
"Market volatility may provide you with some tax-planning opportunities to harvest losses that can be used to offset gains taken later in the year or in future years," Zeltner says. "Having a goals-based blueprint can help ease the stomach churning involved in weighing possible impacts of those short-term moves."
If you're discussing an investment sale with your tax advisor as part of your strategy, Zeltner says it's important to be mindful of the "wash sale" rule, which prohibits investors from taking a loss and buying back the security or a similar investment within 30 days before or after the sale. "As you consult with your tax professional, make sure you understand the pros and cons of the action you are considering so that you can make the best decision for your specific situation."
Zeltner believes that there is no time like the present for investors to start thinking about next year's tax filing. "Many of our clients wait until the end of the year to engage in tax planning. While there are often things that can be done at year's end, the earlier you engage your tax advisors in your overall wealth planning discussion, the more proactive they can be in providing advice that may mitigate your tax bill."