Tax

I am writing to share some important insights regarding tax-loss harvesting, a strategy that can be beneficial for managing your investments and tax obligations.

While tax-loss harvesting is often considered a year-end tactic, it’s also applicable whenever you need to offset gains, especially looking ahead to 2024.

The wash-sale rule disallows a loss from selling stock or mutual fund shares if you buy substantially identical securities within a 61-day window surrounding the sale.

For example, if you sell shares at a loss and repurchase the same or similar shares too soon, the tax code disallows your loss. The rule aims to prevent investors from claiming a tax loss while maintaining a position in the market.

Fortunately, the disallowed loss isn’t lost forever. It’s added to the tax basis of the new securities, reducing future gains or increasing future losses. But navigating this rule requires careful planning.

You could use the “double up” strategy to maintain your position in a stock while still harvesting tax losses.

Additionally, it’s important to note that the wash-sale rule currently does not apply to cryptocurrency losses, as the IRS classifies cryptocurrencies as property, not securities. This exemption offers a unique opportunity for tax-loss harvesting in the crypto market.

If you want to discuss tax-loss harvesting, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 9, 2023

Remember to consider your Section 199A deduction in your year-end tax planning. If you don’t, you could end up with an undesirable $0 for your deduction amount.

Here are three possible year-end moves that could, in the right circumstances, simultaneously (a) reduce your income taxes and (b) boost your Section 199A deduction.

First Things First

If your taxable income is above $182,100 (or $364,200 on a joint return), your type of business, wages paid, and property can increase, reduce, or eliminate your Section 199A tax deduction.

If your deduction amount is less than 20 percent of your qualified business income (QBI), then consider using one or more of the strategies described below to increase your Section 199A deduction.

Strategy 1: Harvest Capital Losses

Capital gains add to your taxable income, which is the income that

• determines your eligibility for the Section 199A tax deduction,
• sets the upper limit (ceiling) on the amount of your Section 199A tax deduction, and
• establishes when you need wages and/or property to obtain your maximum deductions.

If the capital gains are hurting your Section 199A deduction, you have time before the end of the year to harvest capital losses to offset those harmful gains.

Strategy 2: Make Charitable Contributions

Since the Section 199A deduction uses your Form 1040 taxable income for its thresholds, you can use itemized deductions to reduce and/or eliminate threshold problems and increase your Section 199A deduction.

Charitable contribution deductions are the easiest way to increase your itemized deductions before the end of the year (assuming you already itemize).

Strategy 3: Buy Business Assets

Thanks to Section 179 expensing, you can write off 100 percent of most property and equipment. Alternatively, you can use bonus and MACRS depreciation to write off more than 80 percent. To make this happen, you need to buy the assets and place them in service before December 31, 2023.

The big asset purchases and write-offs can help your Section 199A deduction in two ways:

1. They can reduce your taxable income and increase your Section 199A deduction when they get your taxable income under the threshold.
2. They can contribute to an increased Section 199A deduction if your Section 199A deduction currently uses the calculation that includes the 2.5 percent of unadjusted basis in your business’s qualified property. In this scenario, your asset purchases increase your qualified property, which in turn increases your Section 199A deduction.

The Section 199A deduction can get confusing. If you would like my help, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 7, 2023

Wow, how time flies! Yes, December 31 is just around the corner.

That’s your last day to find tax deductions available from your existing business and personal (yes, personal) vehicles that you can use to cut your 2023 taxes. But don’t wait. Get on this now!

1. Take Back Your Child’s or Spouse’s Car and Sell It

We know—this sounds horrible. But stay with us.

What did you do with your old business car? Do you still have it? Is your child driving it? Or is your spouse using it as a personal car?

We ask because that old business vehicle could have a big tax loss embedded in it. If so, your strategy is easy: sell the vehicle to a third party before December 31 so you have a tax-deductible loss this year.

Your loss deduction depends on your percentage of business use. That’s one reason to sell this vehicle now: the longer you let your spouse or teenager use it, the smaller your business percentage becomes and the less tax benefit you receive.

2. Cash In on Past Vehicle Trade-Ins

In the past (before 2018), when you traded vehicles in, you pushed your old business basis to the replacement vehicle under the old Section 1031 tax-deferred exchange rules. (But remember, these rules no longer apply to Section 1031 exchanges of vehicles or other personal property occurring after December 31, 2017.)

Whether you used IRS mileage rates or the actual-expense method for deducting your business vehicles, you could still find a significant deduction here.

Check out how Sam finds a $27,000 tax-loss deduction on his existing business car. Sam has been in business for 15 years, during which he

• converted his original personal car (car one) to business use;
• then traded in the converted car for a new business car (car two);
• then traded in car two for a replacement business car (car three); and
• then traded in car three for another replacement business car (car four), which he is driving today.

During the 15 years Sam has been in business, he has owned four cars. Further, he deducted each of his cars using IRS standard mileage rates.

If Sam sells his mileage-rate car today, he will realize a tax loss of $27,000. The loss is the accumulation of 15 years of car activity, during which Sam never cashed out because he always traded cars. (This was before he knew anything about gain or loss.)

Further, Sam thought his use of IRS mileage rates was the end of it—nothing more to think about (wrong thinking here, too).

Because the trades occurred before 2018, they were Section 1031 exchanges and deferred the tax results to the next vehicle. IRS mileage rates contain a depreciation component. That’s one possible reason Sam unknowingly accumulated his significant deduction.

To get a mental picture of how this one sale produces a cash cow, consider this: when Sam sells car four, he is really selling four cars—because the old Section 1031 exchange rules added the old basis of each vehicle to the replacement vehicle’s basis.

Examine your vehicle for this possible loss deduction. Did you procure the business vehicle you are driving today in 2017 or earlier? Did you acquire this vehicle with a trade-in? If so, your tax loss deduction could be big!

3. Put Your Personal Vehicle in Business Service

Lawmakers enacted 80 percent bonus depreciation for 2023, creating an effective strategy that costs you nothing but can produce substantial deductions.

Are you (or your spouse) driving a personal SUV, crossover vehicle, or pickup truck with a gross vehicle weight rating greater than 6,000 pounds? Would you like to increase your tax deductions for this year?

If so, place that personal vehicle in business service before December 31.

4. Check Your Current Vehicle for a Big Deduction

Your current business vehicle, regardless of when it was purchased, could have a big deduction waiting for you.

Example. Jim purchased a $60,000 vehicle in 2020 and used it 85 percent for business. During the four years he it (2020, 2021, 2022, and 2023), Jim depreciated the vehicle $10,000. If Jim sells the vehicle today for $25,000, Jim has a $19,750 tax loss.

If you see opportunities for deductions that you would like to discuss with me, call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 6, 2023