The 2017 tax cuts are set to expire, and reformers are preparing for potential changes in tax laws. Loss harvesting, a strategy used to minimize capital gains taxes by selling underwater positions, may be at risk of being outlawed. Other tax minimization schemes, such as the bitcoin wash, grantor trust swap, and Roth conversion, could also be impacted by potential law changes. Congress has the power to take away tax benefits that they have previously granted, making it important for investors to adjust their investment strategies accordingly.
The risk of tax increases on savers comes from the potential expiration of the 2017 tax cuts in 2025 and the possibility of new tax laws targeting loopholes that allow individuals to keep money they have earned. The Biden administration has proposed cracking down on tax loopholes for wealthy taxpayers, although the likelihood of these proposals being enacted this year is low. However, after the election, there is uncertainty about what changes may occur in tax laws.
Loss harvesting allows investors to report capital losses while their overall portfolio is performing well. This strategy takes advantage of the tax rule that only subjects appreciation to tax when an asset is sold. Parametric Portfolio Associates has perfected the art of loss harvesting, allowing clients to offset gains elsewhere in their tax returns. However, proposals to change accounting methods could impact this strategy.
Other tax strategies at risk of being impacted by potential tax reforms include the step-up in basis, Roth conversions, and the 20% pass-through deduction. It is important for investors to work with accountants and financial advisors to navigate these potential changes and adjust their investment strategies accordingly. Additionally, strategies such as charitable retirement contributions and college savings accounts may also be affected by future tax law changes.
As lawmakers consider closing tax loopholes and increasing taxes on higher-income individuals, investors should stay informed about potential changes and adjust their financial plans accordingly. By working with professionals and staying aware of tax reform proposals, individuals can mitigate the impact of changing tax laws on their investment strategies. It is important for investors to stay proactive and adapt to potential changes in tax regulations to protect their financial interests.
