As the 2017 tax cuts are set to expire, investors are facing uncertainty about potential changes in tax laws that could affect their investment strategies. Loss harvesting, a popular tax-minimizing strategy, could be at risk of being outlawed, along with other schemes such as the Roth conversion, step-up in basis, and charitable donations. The possibility of tax increases for high-income earners and the closing of tax loopholes by Congress and the White House are looming threats.
One key strategy is loss harvesting, which allows investors to sell underwater positions to capture capital losses while letting winning investments continue to grow. This strategy has been used effectively by firms like Parametric Portfolio Associates, who have managed to offset gains in their clients’ portfolios. However, potential changes in tax laws, such as the adoption of first-in-first-out accounting for stock positions, could impact the effectiveness of loss harvesting.
Other tax avoidance strategies include the step-up in basis, Roth conversions, and the 20% pass-through deduction for unincorporated businesses. The potential sunset of the 2017 tax cuts in 2025 could result in higher tax rates for high-income earners, making these strategies less effective. Investors are advised to work with accountants and financial advisors to navigate these potential changes and adjust their investment strategies accordingly.
Additionally, gifts to relatives and charity, the use of Health Savings Accounts (HSAs), and college savings accounts like the 529 plan are also strategies that could be impacted by future tax reforms. The Biden administration has proposed changes to these strategies, such as limiting the exclusion on gains passed on to heirs and ending grantor trusts. It is essential for investors to stay informed about these potential changes and plan accordingly.
As the landscape of tax laws continues to evolve, investors are urged to reassess their investment strategies and consider adjusting them to account for potential changes in tax policy. Working with financial advisors and tax professionals can help investors navigate these uncertainties and make informed decisions to minimize tax liabilities and maximize investment returns. By staying proactive and informed, investors can adapt to changes in tax laws and protect their financial well-being in the long term.
