By Amy Braun-Bostich, MSFP, CFP®, CFS®, APMA®, CLTC®
With inflation reaching a 40-year high, (1) the value of just about everything is on the rise. In the midst of the market roller coaster, some might forget about the taxes we might pay with the rise of our portfolio or home value. Don’t neglect to keep this reality in mind! As the old saying goes, “The only two certainties in life are death and taxes.” Taxes are the price we pay for civilization, but the good news is that you aren’t completely powerless when it comes to capital gains tax—you can employ certain strategies to help mitigate and manage your tax obligations.
The amount of capital gains taxes you pay is dependent on the amount of time you hold your assets. Having an investment for a year or less will trigger short-term capital gains taxes, which are taxed as ordinary income, as high as 37% in some cases. (2) Long-term capital gains taxes are based on your income and are taxed at 0%, 15%, and 20%. (3) While the simplest way to pay lower capital gains taxes is to hold your assets for more than a year, there are other strategies to prevent taxes from eating away at your wealth.
Make the Most of Tax-Advantaged Accounts
Saving for retirement is one way to avoid taxes on capital gains. With tax-deferred accounts (think IRAs and 401(k)s), you’ll only pay ordinary income tax when you withdraw the money, and you won’t face capital gains taxes on the growth. The same goes for Roth IRAs. Not only will you benefit from avoiding income taxes on the withdrawal if you are 59½ and have held the Roth for more than five years, but you’ll also avoid capital gains taxes.
Strategize Your Gains & Losses
Not all your stock picks are going to provide growth, and there may be times when you have to make some tough decisions about your portfolio. Tax-loss harvesting is a strategy that allows you to offset your capital gains by capital losses. If you own a losing bond, mutual fund, or stock in accounts other than your 401(k) or IRA, review your realized and unrealized gains and losses. You might be able to offset some of your gains by selling some losses, thus lowering your taxable income. And if you live in a high-tax state, you may want to defer tax by deducting up to $3,000 of capital losses in excess of capital gains and carrying any leftover capital losses forward into future years. (4)
Cost basis is another piece of the capital gains tax puzzle to keep in mind. Cost basis is the amount you paid for your asset. There are many ways to decide what cost basis to use if you have multiple asset purchases in different periods. Most investors use the first-in, first-out method (FIFO), but there are other methods, such as last-in, first-out (LIFO) and average cost. Be sure to consult your financial advisor before taking advantage of this option.
Check the Rules for Your Other Assets
If the asset in question is real estate, you may be in luck. Currently, homeowners can sell and exclude up to $250,000 (for single tax filers) or $500,000 (for those who are married filing jointly) of the gains if you owned the property and lived in the house for at least two of the five years prior to selling it. (5) Even better, you can claim this exclusion on another property in the future as long as it’s been more than two years since you previously claimed it.
Business profits are also excluded from capital gains tax and instead are subject to business tax rates. In general, capital gains taxes apply to the sale of personal assets. Your business income is reported differently on your tax return and won’t face capital gains taxes.
Do You Have More Capital Gains Questions?
Although there are many alternative strategies for those who want to offset or defer capital gains taxes or need to structure their income in a way that minimizes taxes, as with anything related to taxes, this can get complicated quickly. Luckily, you don’t have to figure it out alone.
We at Braun-Bostich & Associates are here to help you navigate all your options when it comes to mitigating capital gains taxes—taking into consideration your unique circumstances regarding your sales, cost basis, and length of time of ownership. We’re dedicated to helping you transform your wealth through customized strategies and top-notch services so you can achieve your goals and receive a new vision of what’s possible.
We can examine your options and work with you to set up your investments to operate at their full potential so you won’t face unnecessary tax penalties down the road. Get started by scheduling a free 30-minute phone consultation or reaching out to us at firstname.lastname@example.org or 724.942.2639.
Amy Braun-Bostich is founder, CEO, and private wealth advisor at Braun-Bostich & Associates, a fee-based fiduciary wealth management firm located in Canonsburg, PA. With over 30 years of experience, Amy is dedicated to serving her high-net-worth pre-retiree and retiree clients, helping them transform their wealth through customized strategies and top-notch services so they can achieve their goals and receive a new vision of what’s possible. With a goal of adding value to the lives she touches, Amy approaches each client with compassion and transparency and prioritizes building lifelong relationships.Amy has invested countless hours into growing in her skills and knowledge to bring her clients the best advice possible for their situation. She earned a bachelor’s degree in psychology from UCLA, as well as a Master of Science in Financial Planning. She holds multiple certifications, including CERTIFIED FINANCIAL PLANNER™, Accredited Portfolio Management Advisor℠, Certified Fund Specialist®, and Certification for Long-Term Care. She was named one of Pennsylvania’s Top Women Wealth Advisors in Forbes’ 2022 Best-In-State list. When she’s not helping her clients find clarity and purpose, you can find Amy reading, going on walks, and gardening. She loves to travel and spend time with her family, including her husband, two children, and her dog. To learn more about Amy, connect with her on LinkedIn.