Dear fellow practitioners, CPAs, attorneys and other professionals. Welcome to the second edition of our “Dreidel” newsletter about the planning and investment issues of US citizens living overseas. We will publish a new “spin” every month!

We focus this month’s newsletter on year-end tax loss harvesting, with comments once again from my colleague Mike Reed.

Tax loss harvesting – a look inside the portfolio

Well, it is time to take care of all those year-end items, such as finishing Required Minimum Distributions (RMDs) and doing any tax loss harvesting in accounts.  Each year, during the last week we examine every taxable account to see where we can offset realized gains with hitherto unrealized losses or vice versa.

We wait this long (mid to late December) as we need to consider any capital gains distributions from mutual funds. These do not show up automatically in the realized portfolio P&L, so we must look at account activity in each account to see the mutual fund payouts and what form they take (short or long term capital gains and/or dividends).   

If we must sell something at a loss, then we will look to invest in something similar, as we cannot purchase back the same security for 30 days (wash rule).

This is not an issue in the opposite scenario – selling securities with gains. We can sell stocks with gains, offset these against realized losses, and purchase again immediately. In other words, we are increasing the tax basis, and reducing future capital gains taxes.

If one cannot utilize all losses by offsetting against gains in a single year, the losses may be carried forward.

The 2023 market presents tax loss harvesting opportunities for your clients

2023 may present some good opportunities to do some tax loss harvesting with the way the market has been behaving.

For the most part the “big seven” technology companies (Apple, Amazon, Alphabet-Google, Microsoft, Meta-Facebook, Nvidia and Tesla) have led the market this year and people may be sitting on some large unrealized gains.  Conversely, fixed income and bond investments have been hit hard as the Federal Reserve has raised short-term rates from 0% to over 5%, over the past 24 months. Not all bond and preferred share prices have recovered to prior levels (even if the economic loss is less owing to coupon payments).

So, there is a high likelihood people are sitting on unrealized losses in their fixed income portfolios. A possible strategy here would be to:

• • Sell losing bond positions.

• • Purchase similar types of bonds or bond funds – thereby retaining exposure to the asset class.

• • Take some gains from the sale of a portion of one’s large cap growth stock portfolio – and thereby have a tax offset.

This would also allow for portfolio rebalancing and ensuring that make sure the asset allocation suits the client’s risk level and long-term goals. 

Even if someone does not want to cut his or her equity exposure, one can sell and buy back a stock with a gain, thereby increasing the cost basis.

Last year we had a client sell part of his business, and it was treated as a capital gain. We sold almost all losing positions in his account. For those we still like long-term, we replicated the exposure by investing in similar stocks, ETFs and mutual funds.

Israel portfolios – typical issues that occur

If someone has gains in their US portfolio, but losses in their Israeli portfolio, or vice versa, these can be offset in some cases. 

Israel allows new immigrants and some returning Israelis a ten-year local tax exemption on foreign earnings and investments. One still must pay the taxes in the country of origin (in this case the US).

After ten years, Israel becomes the sole tax domicile. Here things may get complicated, as while one can still offset gains and losses between Israeli and US brokerage accounts, one can no longer take advantage of tax loss carryforwards that accumulated prior to the end of the ten-year period.

Therefore, for people approaching the ten-year anniversary of their immigration or return to Israel, it may make sense to utilize all the US tax loss carryforwards before this date. If there are any questions, please contact us.

Disclaimer

Nardis Advisors LLC (“Nardis”) is a Registered Investment Advisory Firm regulated by the U.S Securities and Exchange Commission in accordance and compliance with applicable securities laws and regulations. Registration does not imply a certain level of skill or training. Nardis does not render or offer to render personalized investment advice through this medium. The information provided herein is for informational purposes only and does not constitute financial, investment or legal advice. Investment advice can only be rendered after delivery of the Firm’s disclosure statement (Form ADV Part 2) and execution of an investment advisory agreement between the client and Nardis.