There are two weeks left to act on any investment decisions to limit your capital gains tax exposure. The first step is to review your investment portfolio to determine if selling some losers before year end will offset capital gains you have already realized. Let’s also not forget to consider actual and expected income in this decision.
Selling Winners
Taxpayers that anticipate higher income next year may want to consider selling their investments this year to reduce their overall tax liability over the next two years, assuming all other variables stay equal. This will be particularly significant if the investment was always planned to be held less than a year or is taxed at ordinary income tax rates as opposed to the 15% long-term capital gains tax rate.
Consider Selling Losers Too
Managing your capital gains tax exposure means looking at all your investments not just the winners but the losers as well. Taxpayers should consider recognizing gains that might not be taxed because there is a loss that can offset it. This means that taxpayers can immediately buy back the stock without being subject to the 30 day wash sale rules.
New Cost Basis Reporting Rules to Consider
Any stocks and ETFs purchased this year will include a cost basis on form 1099-B which is intended to make it easier for you to calculate your capital gains tax. But, this also means that electing the appropriate type of cost basis method will be so much more important than in the past. The days of coming up with a cost basis out of thin air are over.
Figuring Out My Net Capital Gain/Loss
You need to net your long-term capital gains (> than 1 yr investment) with the long-term losses and then your short-term gains (< than 1 yr investment) with your short-term losses. Then, if applicable, you can net the short-term gain or loss with the long-term gain or loss together to see if you have a net capital loss for the year. Remember you can offset capital losses against gains in the current year and realize up to $3,000 in losses against ORDINARY Income (i.e. wages). If your loss exceeds the $3,000, the remaining is carried forward to future years as either a net short-term capital loss and/or long-term loss depending on the character of the loss. This means that prior year short-term loss must first offset the current year short-term gain and the long-term loss must first offset the current year long-term gain. You can go through this exercise now & do some scenario analysis with tax rates and changes in the value of investments to see what makes the most sense from a tax and investment perspective.
More Tax Questions? Ask an accountant online
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