Year-End Tax Tips for Your Investment Portfolio

year-end tax tips
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The markets in 2020 were incredibly volatile, with the fastest bear market in history only eclipsed by the pace of the incredible stock market recovery. But how do all of these gyrations affect the tax bill of your investments, and are there year-end tax opportunities within your portfolio? Here are some tips to minimize the tax burden of your portfolio while also fulfilling your retirement, education, and philanthropic goals.


While the tax tail shouldn’t wag the long-term investing dog, understanding the tax implications of making purchases and sales might help drive its timing. Look for opportunities to sell losing investments to offset gains from other sales. Short-term gains (i.e., gains from assets held one year or less) are taxed at higher ordinary income rates, so look to offset those first.


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An often overlooked tax bill comes via mutual fund distributions. When mutual fund investors sell their shares, fund managers need to sell the underlying positions to generate cash for redemptions. Given the aforementioned market volatility, investors who sell their shares may force the fund to realize gains they otherwise would have avoided. This could result in larger capital gain distributions than expected.

Finally, your modified adjusted gross income (MAGI) determines your eligibility for a variety of tax benefits, ranging from deductions from contributions to your retirement account to certain income tax credits. Taxpayers whose 2020 MAGI exceeds $200,000 ($250,000 for couples) will be responsible for an additional 3.8 percent tax on the surplus. So, if your 2020 compensation totals $200,000 and you have $100,000 in capital gains, you will pay an additional 3.8 percent on the $50,000 (for couples) above the $250,000 threshold.


With the removal of personal exemptions and the increase in the standard deduction as part of the Tax Cuts and Jobs Act of 2017 (TCJA), far fewer individuals now itemize their tax return. This had the unintended consequence of reducing, or even eliminating, your ability to claim charitable giving against your income. For instance, if the combination of all your potential itemized deductions is less than $24,800 in 2020 (for MFJ filing status), you would simply take the standard deduction and get no tax benefit for your donation.


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A popular strategy to clear the standard deduction hurdle is to bunch several years’ worth of donations into a single year. You can donate cash (up to 60 percent of adjusted gross income) or appreciated, long-term securities (up to 30 percent of adjusted gross income). This would allow you to maximize the tax value of your charitable giving by itemizing in those high donation years, and simply taking the standard deduction in all other years.

A donor-advised fund (DAF) is a strategy that builds on the bunching concept and allows for more flexibility with respect to types of assets donated. You simply make an irrevocable donation to a DAF you specify (two of the largest are administered by Schwab and Fidelity) and receive an immediate tax deduction in return. The DAF will manage the money based on your investment preferences and distribute the funds to an IRS-qualified charity of your choosing.

While DAFs do accept cash, they are great vehicles in which to donate appreciated, long-term, and even illiquid securities. You get the advantage of the fair market value of the security in your deduction (up to 30 percent of your AGI), thus potentially reducing your capital gains taxes. DAFs also offer easier recordkeeping — who wants to keep track of multiple physical receipts for direct cash donations?

By following these tips, you can minimize the tax burden of your portfolio while also fulfilling your retirement, education, and philanthropic goals. If you would like to learn more about how to optimize your investment portfolio, feel free to reach out to me.


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Mike Hennessy

Mike Hennessy, CFA, CFP®, is the founder and CEO of Harbor Crest Wealth Advisors. Based in Fort Lauderdale, Mike works with attorneys, families, retirees, business owners, and the boating community throughout South Florida. He focuses on enriching his clients’ financial lives through disciplined financial planning, tax planning, retirement planning, and investment management.

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