Broker Check

Meritage Periodical - October 2022

Advisor Perspective

Prompting critical thinking and conversations around issues in our industry. Not intended as personal financial advice.

What are our opportunities in these challenging times?

Even in the most turbulent times, there are opportunities. Unfortunately, most of them are only easy to see in the rearview mirror. However, we feel one opportunity is apparent today. For non-retirement portfolios, losses can be harvested to offset current and future gains. This is something we’ve been executing and would like to explain how it works.

If you sell an investment at a loss, the IRS allows you to use that loss to offset gains on other investment transactions during the same year. For example, if an investor realizes a $40,000 loss but has no realized gains this year, then the IRS allows a deduction of $3,000 against this year’s tax return and remaining losses can be carried forward for life to offset against any future gains. If that $40,000 loss occurred in 2022, without any gains, $3,000 could be recognized for 2022 taxes, and the remaining $37,000 loss would be carried forward to either offset future gains or deduct $3,000 per year from ordinary income in the absence of gains until the carryforward loss is exhausted. So, it can be a good strategy to intentionally create carryforward losses to help minimize future tax bills.

We never want to sell low and buy high, but that’s not what we’re talking about here. It is possible, especially in this market, to sell low and buy low. This is where we’re seeing opportunities. The IRS only allows the loss to be recognized if you don’t invest in the same (or substantially identical) securities within 30 days before or after the sale. We would never want to stay out of the market for 30 days. To avoid this issue, we simply purchase something similar or something we feel provides a better future opportunity.

There have been numerous and varied opportunities for us to intentionally create losses. Our broadest opportunity has been within mutual funds that invest in bonds. During our regular due diligence process, our Investment Committee identified new funds that we prefer to use in portfolios. We feel strongly that our clients are better served by swapping the old funds with the new funds. At the same time, the benefit of a carryforward loss is created. To be clear, we did sell low but also bought low into a new investment vehicle that we feel has better potential than the original investment.

In good times and bad times, we are proactive in identifying opportunities and risks. We feel this strategy of intentionally creating losses will be greatly appreciated when we are back to realizing gains and our biggest complaint is taxes.

As always, if you have questions about your specific situation, we are here to talk.

Timely Topics

Social Security Updates for 2023

Social Security and Supplemental Security Income benefits will increase for 2023 by 8.7%. The 2023 Social Security increase is the largest in 42 years. In financial planning, social security is a unique and special asset as nothing else is both guaranteed for life and inflation protected. With all other vehicles, you have to choose one feature and forgo the other. For example, annuities provide guaranteed lifetime income but no inflation protection. In contrast, stocks and real estate tend to provide great inflation protection but without any lifetime guarantees. 

The taxable wage base limit for Old-Age, Survivors, and Disability Insurance (OASDI) has increased for 2023. The new wage base is $160,200, up from $147,000 in 2022. Individuals contribute 6.2% of their pay, with a matching contribution made by employers, up to this wage base. The rate for self-employment income is 12.4%. Taxable income earned above the wage base is not subject to OASDI. 

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