PIMCO Education

Year-End Planning: 5 Strategies to Implement Before 2022

Clients look to financial professionals to help them organize their financial affairs and deliver experiential alpha, especially as the end of year approaches. This video provides strategies for investment considerations, tax planning, charitable giving, family meetings, and more.  Looking for CE on the topic? Visit pimco.com/advisoreducation.

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TEXT ON SCREEN: PIMCO

TEXT ON SCREEN: PIMCO EDUCATION –TITLE – 2021 Year-End Planning Strategies with John Nersesian (8 minutes)

TEXT ON SCREEN: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

John Nersesian: Hi. I'm John Nersesian, head of advisor education.

TEXT ON SCREEN: TITLE - Considerations for Year-End Planning Strategies, BULLETS – Investment Considerations: Capital Gains and Losses, Investment Considerations: Wash Loss Sales, Income Tax Management, Tax Reform and Tax Deductions, Year-End Family Meetings

We know that there are a variety of appropriate year end planning strategies that we typically deliver to our clients in order to provide them with the very best advice and in order to help them achieve better outcomes.

TEXT ON SCREEN: John Nersesian, Head of Advisor Education

Let's start first with investment portfolios and the relevant year end strategies pertaining to them.

TEXT ON SCREEN: 1. Investment considerations: Capital gains and losses

As we know, the first strategy is to appropriately recognize capital gains and capital losses in our client portfolios. Let's do a quick refresh.

TEXT ON SCREEN: TITLE – Recognize capital gains/losses;

IMAGE: A table highlights the three tax rates based on income for 2021, shown on the left-hand column: 0%, 15%, and 20%. For income up to $80,800 for married joint filers and $40,400 for single filers, the capital gains tax rate is 0%. The next bracket, from $80,800 to $501,600 for joint filers and $40,400 to $445,850 for single filers, the rate is 15%. Beyond those brackets, the rate is 20%. The chart also includes a note about an addition of a 3.8% net investment tax for those with an adjusted gross income over $250,000 for married filing jointly and $200,000 for single filers, increasing the effective rate for each bracket.

As we know, based on the 2021 tax rates, capital gains are taxed at a preferred rate as compared to ordinary income. We have a zero percent rate up to $80,000, a 15 percent rate from 80,000 to 501, and then finally the maximum capital gain rate for families at above $501,000 is 20 percent.

Please recognize that in addition to these rates, higher income clients, those with incomes above 250,000, are also subject to the 3.8 percent net investment income tax. That essentially creates two additional brackets, 18.8 percent, and it increases that 20% rate to 23.8%.

I want to draw your attention to that zero percent rate that appears at the top of the chart.

For clients who may have seen a reduction in their income during the year, maybe they were between jobs, maybe they were Covid affected, maybe there was recent retirement in their financial lives, that may present an opportunity for clients to selectively realize capital gains in their portfolios, and to fill that lower bracket, to be able to realize these at a lower tax impact.

So the first strategy is to appropriately recognize capital gains and capital losses.

TEXT ON SCREEN: 2. Investment considerations: Wash loss sales

We also want to remind our advisor friends that it's important to avoid the wash loss sale rule in this endeavor to appropriately recognize capital gains and capital losses in client portfolios prior to the end of the year. This wash loss sale rule essentially encompasses a 61 day period of time, 30 days before the sale, 30 days after.

TEXT ON SCREEN: TITLE – Review strategies to avoid wash loss sales

IMAGE: A horizontal time scale shows the holding periods before and after a sale of a security. October 9, in the center of the scale, marks the day of the sale, at a loss. Two 30-day periods flank each side: one before, from September 9 to October 8, and one after, from October 10 to November 8. A table below it lists six hypothetical examples of sales at a loss. The first two don’t result in a wash sale: a sale of one mutual fund and purchase of another one from company A, and the sale of one growth fund followed by the purchase of another growth fund. But the sale of an S&P fund followed by the purchase of another S&P fund probably would result in a wash sale. The following examples would qualify as wash sales: the purchase of a call option on a stock just sold, an asset sold in a taxable account then bought in a spouse’s account, and an asset sold in a taxable account but then bought for an individual retirement account.  

Now there are a variety of ways in which clients can generate capital losses in their portfolios appropriately without running afoul of the wash loss sale rule. Our client can simply sell the asset for a loss, and then wait the required 30 days before repurchasing it.

So if I own GE stock at a cost basis of 50, the stock's trading for a lower price today, I can sell those shares, book the loss for tax purposes, and then wait the required days before repurchasing it.

TEXT ON SCREEN: TITLE – Planning options for wash loss sales.

IMAGE: A table shows four strategies and their planning considerations. The first strategy is to sell an asset at a loss, with a note that it can be re-purchased after 30 days. The second strategy involves doubling up on the position, and selling the original lot after the 30th day, with a note that November 30 is the last day to buy for a sale at a loss in 2021. The third strategy is to sell a position, then buy a new position in the same sector, with an example of selling one clothing retailer and buying another. The fourth strategy is to sell the position, purchase an index ETF or fund in the same sector, such as selling an auto stock and buying an auto ETF or fund.

For those of you who might contemplate this strategy, please recognize that November 30th would be the last date to buy these shares with the ability then to sell the original position for the purposes of booking a loss in 2021.

Let's now turn our attention to the second grouping of year end strategies, those that specifically focus on income tax management.

TEXT ON SCREEN: 3. Income tax management

TEXT ON SCREEN: TITLE – 2021 income tax brackets; SUBTITLE – Ordinary income tax rates

 

IMAGE: A table lists six different ordinary income rates and their income ranges for married-filing jointly and single filers. The rates listed include 10%, 12%, 22%, 24%, 32%, 35% and 37%. For example, at 10% the income range is $0 to $19,000 for married-filing jointly, and $0 to $9,950 for a single filer. The table progresses to 37%, which applies to incomes above $628,300 for married-filing-jointly and $523,600 for single filers. 

Let's do a quick review of the 2021 income tax brackets. We know that we deal with a federal rate that is progressive in nature, starting at 10 percent and then currently capping at 37 percent for families at $628,000 and above.

TEXT ON SCREEN: 4. Tax reform and tax deductions

We also recognize that tax reform is part of today's conversation, and it is very likely that we will see some sort of tax reform between now and the end of the year, most likely to be effective as of 2022. The current rate being discussed is an increase from 37 percent to a potential maximum marginal rate of 39.6

TEXT ON SCREEN: TITLE – 2021 standard and itemized deductions

IMAGE: A table shows four different categories of filing status along with their standard deductions. For married-filing-jointly, the standard deduction is $25,100. It’s $12,550 for single filers, $18,800 for head of household, and $12,550 for married, filing separately. The table also notes additional deductions of $1,350 for married and $1,750 for single filers for those age 65 and over and for the blind.

Given the changes that took place under the Tax Cuts and Jobs Act that became effective in 2018, we know that the standard deduction has increased from $12,000 to today's level of just over $25,000, relatively high.

We also recognize that itemized deductions that are available to our clients under Schedule A are significantly reduced. Let's review them for clarity.

TEXT ON SCREEN: TITLE – 2021 standard and itemized deductions

IMAGE: A table shows the standard deductions by filing status and examples of itemized deductions. The standard deduction is $25,100 for married-filing jointly, $12,550 for single, $18,800 for head of household, and $12,550 for married, filing separately. The table also notes additional deductions of $1,350 for married and $1,750 for single filers for those age 65 and over and for the blind. The examples of itemized deductions include special notes. Medical expenses are subject to a 7.5% floor of adjusted gross income. State and local taxes have a $10,000 cap. Mortgage interest is capped based on the size of the loan, and charitable gifts are limited based on type and the recipient.

One of the itemized deductions available today remains medical expenses. But medical expenses are only deductible to the extent that they exceed 7.5 percent of our client's AGI. Very few clients are in a position to take advantage of that medical expense deduction. We know that SALT taxes, state and local taxes, property, and the checks that we send to our local governments, are deductible, but with a cap of $10,000.

Now there is current conversation about potentially eliminating that cap or at least increasing it to provide relief to residents of states like New York, and New Jersey, and California, and other high state income tax states. SALT taxes are deductible currently, but at a cap of 10,000.

TEXT ON SCREEN: TITLE – 2021 standard and itemized deductions

IMAGE: A table shows the standard deductions by filing status and examples of itemized deductions. The standard deduction is $25,100 for married-filing jointly, $12,550 for single, $18,800 for head of household, and $12,550 for married, filing separately. The table also notes additional deductions of $1,350 for married and $1,750 for single filers for those age 65 and over and for the blind. The examples of itemized deductions include special notes. Medical expenses are subject to a 7.5% floor of adjusted gross income. State and local taxes have a $10,000 cap. Mortgage interest is capped based on the size of the loan, and charitable gifts are limited based on type and the recipient.

Mortgage interest is deductible, but if our clients have a mortgage, and only if they are itemizing their deductions.

How's that for an interesting conversation?

We've all assumed that mortgage interest was always tax beneficial. But for certain clients who are claiming the standard deduction, the mortgage interest paid may not be providing the tax benefit that they've assumed.

TEXT ON SCREEN: 5. Year-end family meetings

Here's our last strategy, it's to engage your clients in family wealth education meetings.

TEXT ON SCREEN: TITLE – Conduct family wealth education meetings.

IMAGE: A bulleted list of four items highlights the keys to success. The items include: solicit input from the entire family when setting the agenda, develop an action plan and include individual responsibilities, hold the meeting in a neutral location, commit to regular meetings in the coming year.

Now I recognize that this endeavor can be facilitated throughout the year. But the end of the year is typically a great time to help facilitate these conversations, to bring the family together, to talk about their values, to talk about their expectations, to talk about their responsibilities, to discuss or contemplate their legacy.

I don't know at what age this occurs. Maybe it's when a client reaches the age of 60 or 70. Maybe it's a net worth issue.

Once I've accumulated enough money to satisfy for my own retirement needs, my attention shifts, not to my own individual needs, but the future legacy that I'll eventually leave behind. And while this is a very important goal for many clients in the circumstances that I've just articulated, clients are unsure as to how to facilitate. They've never done it before. They're not comfortable discussing money and expectations with their family members or beneficiaries.

TEXT ON SCREEN: TITLE – Conduct family wealth education meetings.

IMAGE: A bulleted list of four items highlights the keys to success. The items include: solicit input from the entire family when setting the agenda, develop an action plan and include individual responsibilities, hold the meeting in a neutral location, commit to regular meetings in the coming year.

This is a great opportunity for you, as their trusted advisor, to provide this very valuable service, to bring the family together, to facilitate progress and advancement on this very important goal of financial stewardship. Thank you for joining us for this brief conversation around a handful of relevant year end planning strategies. Please visit us at pimco.com to learn more about our resources and educational opportunities around these strategies and others.

TEXT ON SCREEN: To learn more visit pimco.com/advisor education or speak with your Account Manager

TEXT ON SCREEN: TITLE – PIMCO

IMAGE: PIMCO logo with the number “50” underneath it, with 1971 on one side and 2021 on the other.

Disclosure

PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.  Any tax statements contained herein are not intended or written to be used, and cannot be relied upon or used for the purpose of avoiding penalties imposed by the Internal Revenue Service or state and local tax authorities. Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

The views and strategies described may not be appropriate for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. You should consult your tax or legal advisor regarding such matters. Please contact your account manager for further information.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2021,  PIMCO.

Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626.

CMR2021-1025-1885001


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