Lifepoint Financial Design – LifePoint Financial Services – Mike Metzger Financial Planning

You can manage taxes by buying and selling gains and losses in your investment portfolio by using simple strategies

So, you just went to your accountant and had the very unpleasant surprise that your tax bill is much higher than expected. It’s like getting the air knocked out of you!

Few words can dampen the cheer and optimism of a new year like taxes. But if you approach taxes with an eye toward reducing your liability for next year, the concept becomes more amenable. And indeed, there are numerous tax-savings strategies that you can implement that could potentially reduce your tax obligations. Let’s take a look:

Turn Losses into Gains

If you anticipate that your investments will yield short- or long-term capital gains, you can offset these with realized capital losses, according to the IRS.

For stocks or funds that you hold less than a year, the gains (short-term) are taxed at ordinary rates from 10% to 37%, which you can offset with short-term losses. Similarly, for assets that you hold longer than a year (long-term), the gains are taxed at a top rate of 20%, which you can reduce by long-term capital losses.⁠ If your losses exceed your gains, you can deduct up to $3,000 in capital losses against your ordinary income on that year’s tax return, while carrying forward unused losses, if any, to future years.

Accordingly, you might consider avoiding short-term gains, since these are taxed at higher rates. If you are anticipating a short-term gain, either offset them with short-term losses, or else consider holding onto the assets for at least a year, when they become long-term assets.

With everyone so focused on this rising market, especially in technology stocks and funds, it’s easy to get caught up in the hype. You may have been tempted to trade in and out of “hot stocks”, like Tesla, Gamestop, and the like. But, you may not have thought about the tax implications that come around at the end of the year.

Review your portfolio and estimate your gains and losses. Most capital gains and losses are triggered when you sell the asset, offering you control over the event. However, others — mutual funds, for instance — are difficult to predict as they are comprised of numerous individual stocks and bonds. Assess those assets that have performed well and those that have incurred losses. If there are under-performers that can cover your gains, it will help minimize your capital gains tax.

This is especially important to do when we experience market corrections, like when COVID-19 hit in March 2020. It’s difficult to think about taking losses during scary times, but the market always tends to come back in the long-run. Those losses are your IRS capital gains discount coupon for future returns. The catch is the coupon expires every year, so don’t miss the opportunity to use that coupon!

Also, it is advantages to elect losses before gains, as you can carryover unused losses to future years. Capital gains are taxed in the year in which they are realized.

Avoid the Net Investment Income Tax

The IRS assesses a 3.8% tax on unearned income for high-income taxpayers, which applies to single taxpayers with a modified adjusted gross income of $200,000 or more and for those who are married and filing jointly with a modified adjusted gross income of $250,000 or more. This increases the top rate on most long-term capital gains to 23.8%, which applies to interest, dividends, royalties, and rents, among other items (collectively called “net investment income”).

Assets that do not fall under this net investment income classification and thereby avoid the 3.8% additional tax include distributions from IRAs or qualified retirement plans, annuity payouts, and income from tax-exempt municipal bonds. Consider these distinctions to avoid additional tax liability.

Looking Forward

As the tax laws change frequently, consult a tax or financial planner to assess ways that you can manage your tax burden.

If you need help specific to your tax and investment situation, take advantage of a complimentary consultation and financial plan. I’m here to help you keep more of your income and increase your cash flow


This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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