You ever make a ton of money from a friend’s “hot stock tip”? No need to respond. The answer is no. I know this because no one ever has. Somehow, any time someone gives a friend a stock tip it all goes south. The last time I invested based on a friend’s stock tip, the company went bankrupt within a week. But it happens all the time. We share these hot tips on companies we know absolutely nothing about. I guess the thinking behind it is if we’re gonna go down then we’re taking down everyone we know.
Apparently some people are making money in the market since the market closed at an all-time high recently. So that being said, with the end of the year approaching, I will discuss how you can make use of your stock portfolio to lower your tax bill. Below are seven tax strategies that you can use to your advantage.
First, let’s go over some background information. Your short-term capital gains (stocks owned for one year or less) are taxed like ordinary income. This means you pay federal taxes at rates of up to 43.4 percent. The 43.4 percent comes from the top income tax rate of 39.6 percent plus the 3.8 percent Affordable Care Act (ACA) tax on investment income. You only pay taxes on your long-term capital gains (stocks owned more than a year) at rates of up to 23.8 percent (20 percent for capital gains plus 3.8 percent on investment income). And if you are in the 15 percent income tax bracket, then you pay 0 taxes on long-term gains.
The goal of the strategies below is to avoid the 43.4 percent tax, and instead pay tax at the lower 23.8 percent or even 0 percent rate when possible.
Examine your portfolio for stocks that you want to unload. When you sell stocks subject to short-term gains (with a tax rate as high as 43.4 percent), also sell stocks subject to long-term losses (with a tax rate up to 23.8 percent). The losses can be used to offset the gains.
In other words, make the high taxes disappear by offsetting them with low-taxed losses, and pocket the difference.
Use long-term losses to offset up to $3,000 of your ordinary income. Again, you are trying to use the 23.8 percent loss to kill a 43.4 percent tax.
If you have plenty of capital losses, use this as an opportunity to get some tax-free capital gains. You can sell additional stocks, rental properties and other assets knowing that the gains will be offset against your extra losses.
Under the wash-sale rule, if you sell a stock or other security and purchase substantially identical stock or securities within 30 days before the date of sale or after the date of sale, you may not recognize any loss on that sale. You definitely want to avoid this.
If you want the loss deduction in 2016, you have to sell the stock and wait at least 30 days before repurchasing that stock. You never want to throw away a capital loss.
If you usually give money to your parents or older children (old enough that they are not subject to the kiddie tax), consider giving appreciated stock to them instead. If they are in lower tax brackets than you are, you get a bigger bang for your buck by gifting the stock to them and having them sell it. They pay tax on it and their lower rate, which may even before 0 percent.
This strategy allows you to provide funds to family members while avoiding taxes on your gain.
Similarly, you should consider donating appreciated stock to charity instead of cash. You get a big benefit at a low cost using this strategy. You can deduct the fair market value of the stock even though you may have paid much less for it. You also avoid taxes on the gain had you sold it.
Finally, if you could sell a stock at a loss, do not donate that loss-deduction stock to charity. Instead sell the stock first to create your tax-deductible loss and use it for your own benefit. Then give the charity the cash from the sale of the stock as your donation.
By Daniel Magence, CPA, Esq.
Daniel Magence, CPA, Esq. is a principal at Pristine CPA Solutions, LLC (www.pristinecpa.com). Pristine CPA Solutions offers tax and accounting services to individuals and businesses of all sizes, whether it’s tax returns, bookkeeping, payroll services or personal income budgeting. He can be reached at [email protected] or 201-326-6908 if you have any questions or comments, or are interested in using Pristine CPA’s services. Feel free to contact us for a free consultation.
