The stock market is now roughly eight years into a bull market, and over the past 12 months, markets have risen roughly 16 percent with many individual stocks up much more. Many investors are likely finding themselves sitting on capital gains in their brokerage accounts, stock-based mutual funds, or dividend reinvestment plans.
Being that we are in early October with time to do some planning now can be a great time to evaluate your investments with an eye on making some solid tax planning decisions. Here are a few tips to get you started.
Go back and look at last year’s tax return. The Schedule D page on your return will list any carryover losses you may be storing on your tax return. Accountants will often deduct carry over losses against regular income at a pace of $3,000 per year, which isn’t a bad thing, but if those carry over losses can be accelerated and used to offset some of the current gains in your stock portfolio it's even better. Because your accountant is unlikely to know about the gains in your stocks, and because he or she won’t see your tax materials until next year, this “to do” list item is going to fall to you.
Take a close look at your brokerage account statement or sit down with your financial advisor. Because of the accounting used with many bond-based investment strategies, it's not unusual for fixed income investments to have embedded capital losses associated with them. These losses can be realized and used to offset gains from the stock side of the portfolio. Just looking at the first page of the statement to see if you made or lost money last month isn’t going to cut in on this one, you’re going to have to do more a deep dive to see what strategies you and your advisor can come up with.
Don’t forget about your church or favorite charity causes. Gifting appreciated stock to a non-profit charity can be a win-win for both parties. If the stock is gifted “in kind,” no capital gain tax event (sale) is triggered and the value of the stock may actually be deductible on your Schedule A. Most established charities can accommodate this type of gift, and the process is actually quite easy. I’ve personally used gifts of appreciated stock to satisfy multi-year pledges to my church and it worked great.
How does zero percent capital gains tax sound? Taxpayers with income levels in the lowest two tax brackets in 2017 qualify for a zero percent capital gains rate. For single taxpayers with income less than $37,950 and married taxpayers with income less than $75,900, this rule may apply. This can be a boon for early retirees who are using assets for income, and with some planning, it may help avoid unnecessary taxable IRA or 401(k) withdrawals.
This strategy can be a bit more complicated and it could be a good excuse to get your tax advisor and your investment advisor together to discuss. What a good time that will be, just decide ahead of time who brings the coffee.