You've been investing for a while now, and you've done a pretty good job. But let's be honest, taxes can suck the life out of your hard-earned gains. It's time to level up your investing game and minimize that tax bite.
Understanding Capital Gains tax
Capital gains tax is the tax you pay on the profit you make when you sell an investment for more than you paid for it. There are two types:
Short-term capital gains
- If you sell an investment within a year of buying it, that gain gets taxed at your ordinary income tax rate—the same rate you pay on your salary.
- Surprise! That could be 22%, 24%, 32% or more, depending on your bracket. If you're not planning for it, the tax bill can feel like a gut punch.
Long-term capital gains
- Hold the investment for more than one year before selling, and your gain qualifies for long-term capital gains tax rates—currently 0%, 15%, or 20%.
- Much better, right? If you’re in the 32% ordinary income bracket, paying only 15% on that gain feels a lot more reasonable.
How much did you pay for that? Know your "cost basis"
Your cost basis is the original purchase price of your investment. It's crucial to track your cost basis accurately, especially if you've reinvested dividends or made additional purchases. Good news is, most custodians (like Schwab, Vanguard, etc.) do this for you. You'll need to keep an eye on your Cost Basis when you go to sell an investment in a taxable brokerage account- as that can trigger potentially huge tax implications (good and bad).
Tax-Loss Harvesting: your secret weapon
Tax-loss harvesting is a strategy where you sell losing investments to offset capital gains. It's like a tax shield. Here's how it works:
- Sell the Loser: Identify investments that have decreased in value.
- Realize the Loss: Sell these investments to realize the capital loss.
- Offset Gains: Use the realized loss to offset any capital gains you've made.
- Buy a Similar Investment: To avoid a "wash sale," wait 30 days before buying a similar investment.
Instead of selling all your appreciated investments at once, consider spreading out the sales over multiple years. This can help you stay in a lower tax bracket. Note that if you've hired an advisor, many times Tax Loss Harvesting is a technique they will carry out on your behalf, when it makes sense for your financial life.
Charitable giving: a win-win
Donating appreciated securities in your taxable brokerage account to charity can be a smart tax move. You'll avoid capital gains tax on the appreciation and may be able to claim a charitable deduction. Just keep in mind, that gift is irreversible.
Gifting shares: a family affair
At a loss for holidy gifts this year? Gifting appreciated shares in your taxable accounts to family members in a lower tax bracket can be a tax-efficient strategy... just be mindful of gift tax rules and consult with a tax professional.
Diversify, Diversify, Diversify
Diversifying your investments can help reduce risk and potentially lower your tax bill due to giving you opportunities to Tax Loss Harvest, like we talked about earlier.
Hire a pro: let the experts handle it
If you're overwhelmed or don't have the time to manage your investments and taxes, consider hiring a financial advisor. A good advisor can help you develop a comprehensive financial plan, including tax-saving strategies, and help implement them for you so you don't have to think about it.
Remember, tax planning is an ongoing process
Tax laws can change, and your financial situation may evolve. It's important to review your tax strategy regularly and make adjustments as needed.
Let's Wrap It Up
Minimizing your tax burden is an essential part of maximizing your investment returns. By understanding these strategies and working with a qualified financial advisor, you can take control of your financial future.
Investment advisory services offered through Equita Financial Network, Inc. an investment adviser with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Equita Financial Network also markets investment advisory services under the name, Astraea Wealth Management LLC. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.