Oct. 2021 – Year-End Tax Considerations

As we approach year-end, investors with taxable accounts should consider taking action to reduce any tax liability due on capital gains they may have realized throughout the year. Here we describe techniques for offsetting these gains, as well as other means of reducing your tax burden in 2021 and beyond.

Tax Year 2021

Tax year 2021 provided a respite in capital markets after an extraordinarily turbulent 2020. Covid-19 outbreaks emerged in February 2020 and markets quickly plummeted. From peak to trough, major stock market indices fell upwards of 35 percent. However, markets proved resilient. Disciplined investors were soon rewarded, as U.S stocks reached new highs by August 2020. This marked the fastest recovery from bear-market territory in U.S. history.

Market positivity continued into the new year, as markets rallied on government stimulus, vaccine distribution, and the prospect for a return to normalcy. U.S. stocks have maintained strong performance in 2021. Meanwhile, previous laggards such as REITs and international stocks have also surged. Those with exposure to small cap and value stocks are enjoying particularly strong year-to-date returns.

The volatile swings in early 2020 allowed shrewd investors to realize tax losses. As markets recovered, periodic rebalancing trades produced taxable gains. Many investors used previous losses to offset these gains. Some investors even retained sizable tax-loss carryforwards after filing.

For 2021, sustained market optimism provided little opportunity to harvest tax losses. Still, other tax mitigation strategies exist for mindful investors. Investment selection, asset location, estate planning techniques, and charitable giving all present opportunities to minimize your future tax bill. This article will review these important tax planning techniques. Although major tax changes loom, no one can predict the outcome of the legislative process. This article therefore outlines tax planning strategies under the current tax code.

What’s My Rate?

Before making any year-end portfolio rebalancing decisions, it is important to estimate your marginal income tax rate. This is the effective rate you would pay on each additional dollar of taxable income. Be aware that this estimation is complicated by a variety of deductions, exemptions, and tax credits. However, tax software, a tax professional, or a competent financial planner can assist with the calculation.

Also In This Issue

Quarterly Review Of Capital Markets
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Asset Class Investment Vehicles