Year End Investment Planning
Although tax planning is important for investors year round, it is most important as the calendar year draws to a close. While investment decisions are made throughout the year, they are particularly critical at year end because of the potential tax implications. The United States tax code provides many tax planning opportunities for investors but the majority neglect to use what is available to their maximum advantage. The failure of investors to implement end of the year tax planning strategies (summarized below) can have a significant negative impact on overall investment performance.
Realizing Capital Losses
Consider the following points related to selling investments at a loss before the end of the year:
- Up to $3000 in capital losses can be used to offset ordinary income.
- Capital losses can be strategically paired with capital gains to lighten the tax burden of selling other investments at a profit.
- Any capital loss in excess of the $3000 limit that can be used to offset ordinary income that is not used to offset capital gains can be carried forward into the next tax year.
- Short term capital losses are paired against short term gains and long term losses against long term gains until either category is used up. Once that happens, leftover losses and gains are paired against each other.
- A taxpayer who projects a significant decrease in income for the next calendar year might be wise to realize capital losses in the current year so that the tax benefits of those losses will be applied at the higher tax bracket.
Realizing Capital Gains
Consider the following points related to selling investments for a gain before the end of the year:
- Short term capital gains (gains on investments held less than 12 months) are taxed at a taxpayer’s ordinary income tax rate which is anywhere from 0% to 39.6% (the new top rate in 2013). In addition, those taxpayers who have an adjusted gross income of over $200,000 or $250,000 for a married couple have an additional Net Investment Income Tax of 3.8% added to the 39.6% for a total tax rate of 43.4%. With this in mind, investors may want to defer selling assets that would be subject to short term capital gains rates and hold them until the lower long term rates would apply.
- Taxpayers who are in the 10% and 15% tax brackets pay 0% tax on long term capital gains and may want to think about realizing any such gains while the 0% rate still applies. On the other hand, those who are in the top tax bracket currently pay 20% on long term gains plus the Net Income Tax surcharge of 3.8% for a total or 23.8%. Taxpayers in this category may want to think twice about realizing long term gains at the end of the year unless they have losses to offset them.
- A taxpayer who projects a significant increase in income for the next calendar year might be wise to realize capital gains in the current year so that the tax consequences of those gains will be applied at the lower tax bracket.
In addition to decisions related to realizing capital gains and losses, end of year tax planning for investors may involve such other considerations as gifting of assets, Roth conversions and allocation of assets between dividend and non-dividend paying stocks. While investment decisions are always important, they are most critical as the tax year closes because they determine the final balance sheet that will be carried over into tax season. Proper tax planning, especially at this time of year, can a very important factor in determining what percentage of the yearly investment returns are retained in the portfolio and what percentage must be passed on to the government.
If you have questions relating to capital gains or losses ,asset allocation for tax purposes, Roth conversions, gifting of assets or any other tax related investment topic, our certified tax professionals can provide you with the answers you are looking for. For more information about our services, visit us today at www.professionaltaxresolution.com or call us at 877.889.6527. We have a thorough understanding of tax law together with the experience to know how to apply it to its maximum advantage for your specific set of circumstances.