Tax Planning in a Recession

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Are we in a recession? Some would say that if we’re not there yet, all signs point in this direction. Last week, the hottest stock market headlines were that of Warren Buffet unloading stock pointing toward a certain downturn in the economy. Regardless of where you get your investment news, it’s helpful to be aware of what tax planning scenarios can best help your clients in a less-than-ideal climate.

The unsteadiness in the current market stems mostly from uncertainty on monetary policy and inflation. Inflation has soared over the last year with mortgage rates reaching the 7% mark. Many are looking at the higher rates to bottom out soon. So how does that forecast play out in tax strategy?

  1. This might be the right time for Roth conversions. This is obviously specific client by client, however, clients may experience a compression of their taxable income in a recessive state and could fall below the conversion thresholds in some cases. What is even more apt to happen is that declines in the stock market could reduce values in existing plans like traditional IRAs and 401(k)s. Converting when market prices are low gives the dollars a chance to rise in a post-tax vehicle like the Roth. While this strategy may not provide immediate savings to every client, with those who have high pre-tax account values, this may be one strategy to deploy for long-term planning.
  2. Harvesting investment losses may be helpful. It doesn’t always make financial sense to sell investments at a loss, however, if a client has something in particular they looking to address, like the gain on the sale of a rental property or some other form of appreciated investment, it’s worth looking at where losses may help. If the market does and it makes sense to sell off assets that have a less desirable financial performance, this is one strategy that clients can benefit from in a down economy.
  3. Setting up an HSA can help families save. For one, contributions to an HSA are only allowed when an individual or family is enrolled in a high-deductible health plan. This strategy can also be helpful when client income is compressed as high deductible plans also tend to have lower premiums. Starting in 2024, taxpayers can contribute $4,150 per individual and $8,300 per family to an HSA pre-tax. The earnings on these accounts grow tax-free when used for qualified medical expenses and unused balances can be rolled over from year to year. The funds can be used on qualified medical expenses which can even include over-the-counter items like Tylenol and certain necessary toiletry items like bandages, sunscreen, and contact lenses.
  4. Help your clients adjust their withholdings and estimates. If clients are experiencing compressed income levels or higher payments for deductions like mortgage interest, consider helping them adjust their withholdings and/or estimates to reflect current projections more accurately. In a recession, most individuals will feel cash flow slow down. Any place where expenses can get cut is helpful, although they also do not likely want to accrue a large tax liability without being prepared. Helping them generate accurate projections and adjust accordingly throughout the year can help create a good plan that doesn’t have them paying out more than they need to.

We may not be able to predict the market changes in 2024, but keeping tax strategy in your pocket for when your clients need it most can help to bolster your firm’s reputation for being valuable advisors.

Christine Gervais

Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and providing strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.