With only 10 days remaining in the year, it’s time to act to save taxes by looking at your capital gains and losses.
What do you do if you have capital losses to date? Let’s assume you lost money in the stock market during 2013, yet you hold investment assets that have appreciated in value. If you believe the appreciated investments have peaked in value, you can sell these investments to offset these gains by the pre-existing losses.
Long-term capital losses offset long-term capital gains before they offset short-term capital gains. In addition, short-term capital losses offset short-term capital gains before they offset long-term capital gains. You may use up to $3,000 of total capital losses in excess of capital gains as a deduction against ordinary income. Remember, to get the benefit from lower long-term capital gains rates, you will need to hold the stock for a year and one day.
For example, suppose you have $10,000 in short-term gains in year 1 and $10,000 in long-term losses as well. You’re in the highest tax bracket in both years, let’s assume 39.6%. All of your other investments have been held more than one year and have appreciated in value by $10,000. If you sell this $10,000 of appreciated stock this year, they will be netted against the long-term losses and leave your short-term gains to be taxed at 39.6%. Alternatively, if you can hold off and sell them in year 2, the losses will “absorb” the short-term gains. In year 2, the long term gains will be tax at 20%.
When planning for capital gains and losses, it is also important to keep in mind the wash sale rules. You cannot deduct the loss realized on the sale of stock or securities if you purchase substantially identical stock or securities within the period beginning 30 days before the ending 30 days after the sale. Therefore, be careful when you replace stock that was sold at a loss.
For most individuals, long-term capital gains on most types of investment assets are taxed at a maximum rate of 15%. However, that 15% rate is 0% if the individual’s ordinary rate is below 25% and it would be 20% to the extent the individual’s ordinary rate was the new 39.6% tax bracket. Long term capital losses will be more valuable if they are used to offset short-term capital gains taxed at your ordinary rate or offset up to $3,000 per year of your ordinary income, rather than long term capital gains taxed at 15%, 20% or 23.8%.
Starting in 2013, a 3.8% tax on net investment income applies to taxpayers with modified adjusted gross income exceeds $250,000 for joint filing taxpayer and $200,000 for single filing taxpayers. After the 3.8% tax is factored in, the top rate on long-term capital gains is 23.8%.
If you would like to discuss some capital gain planning strategies, please contact me.
Written by Rebecca DeWolfe