This coming year is one characterized, economically speaking, by cautious optimism. America is in the process of recovering from a historically dark year. Amid the coronavirus pandemic and its resulting shutdowns, US economic growth plummeted to lows not seen since 1946, when the country began easing back on its wartime spending.
But after a few months of slow but increasing growth, matters seem to be looking up. Recovery is on the horizon — but what does its arrival mean for your tax strategy?
Fiduciary advisors at Goldstone Financial Group recommend that those who suffered investment losses in 2020 make the best of their situation through tax-loss harvesting.
“Tax-loss harvesting is always a great strategy for investors to have in their back pocket during filing season,” Anthony Pellegrino, Goldstone Financial Group’s founder and principal, explained.
But in 2020, when countless investors saw the value of their holdings plummet, it became downright invaluable.
In tax-loss harvesting, selling an underperforming asset provides a capital loss tax credit that an investor can use to either lessen the severity of their loss or offset the capital gains tax liability posed by investments that accrued value.
But now, investors need to start planning their tax approach based on the assumption that the US will undergo significant economic growth in 2021. The job market is on the rise and consumer spending is strong — public and private forecasters alike have offered sunny predictions for the year’s growth.
“We have revised up our forecast for full-year GDP growth for 2021 to 6.4%,” Wells Fargo informed clients in early March. “That rate is not only above the consensus expectation, but if realized it would make the fastest pace of growth for the US economy since 1984.”
These numbers are remarkable, given the troubling financial straits the US faced only a few months ago. But in light of these optimistic expectations, investors need to consider how increases in asset valuation might impact their tax burden.
“Every time an individual or corporation sells an investment at a profit, they’re responsible for paying a capital gains tax,” Anthony Pellegrino notes.
The amount you pay depends on your tax bracket and how long you’ve held the asset. If it’s been in your possession for over a year, you could hand over between zero and 20 percent of your sale profits. If you’ve had it for less time, the IRS taxes profits as ordinary income.
But your financial gains shouldn’t leave you with a large tax bill. The fiduciary advisors at Goldstone Financial Group suggest that individual investors create a cohesive investment and tax strategy that maximizes their returns while minimizing their tax burden.
If that sounds too difficult, never fear — you don’t have to go through it alone. An asset manager can help guide you through complex investment decisions and plan your tax strategy.
“Asset managers can help the average investor build towards whatever financial goal they might have,” Anthony Pellegrino explains. “If you want to establish a college fund, buy a new home, or plan for retirement, a certified financial professional can help you do so.”
With that being said, Pellegrino cautions against signing on with the first financial advisor you meet.
“At Goldstone Financial Group, we see asset management as a relationship, first and foremost,” Anthony Pellegrino says. “But not all advisors share our perspective. When you search for advisors, you need to understand how your advisor gets paid and if they have any personal conflicts with managing your money.”
The best approach, Pellegrino says, is to find a fiduciary advisor who is legally bound to put their client’s financial interests above their own.
“This is your money, your future,” Pellegrino asserts. “You should partner with an asset manager who will help you protect and grow your assets over time.”
It’s never too early to start planning your next year’s tax strategy. To get started, ask a fiduciary advisor what you can do to maximize gains and minimize taxes in 2021.
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