What a Strong Year Means for Tax Season | Moneta

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By Dave Sadler

With tax season upon us, we thought we would send a quick “heads up” Voice of Moneta note.

As you know, 2013 was a very strong year for the stock market with significant gains in all equity market segments with the exception of emerging markets.  2013 was also the 5th year of recovery following the market lows of early 2009 with many market indices achieving new highs during the year.  All of this is good news.

So, why the “heads up” message?  With a strong market year and a longer period of solid market returns, above average realized capital gains tend to be more prevalent.  For most clients, we are also seeing any remaining capital loss carried forward from the 2008-2009market correction fully utilized.  The end result is the possibility of higher taxes related to above average realized capital gains.  This possible scenario is something we keep in mind as we consider cash flow planning throughout the tax season.

The other factor to keep in mind for 2013 is the changes in the tax law for higher income tax payers. Click here for an overview of these changes from a previous communication. Depending on your overall level of 2013 adjusted gross income and the combination of ordinary income and investment gains/income, the impact of these changes can be relatively significant.

Although we have been discussing this topic throughout the year, the reality of the tax season will certainly bring the matter to the forefront.  In this context, we have the following suggestions:

  1. If you have extra cash reserves available today, we would encourage maintaining more cushion until after tax season.
  2. If your portfolio needs rebalancing to capture some of the very nice equity gains, it is prudent to reserve a portion of the proceeds for potential tax payments.
  3. Do not let taxes control your investment thought process. We encourage portfolio rebalancing despite the capital gains.  We just need to plan for the taxes accordingly.
  4. Get your information delivered to your tax preparer as soon as possible.

We are hopeful this trend continues into the New Year as we will always trade taxes for solid portfolio gains.  In many respects, this”heads up” cash flow warning is a good problem to have.  As with many things, the key is to avoid surprises and communicate proactively, hence the purpose of this message.

Please consult with your Moneta advisor or tax professional if you have specific questions concerning your situation.