Sell high, buy low – this seemingly simple investing concept becomes a bit more complicated due to the taxability of capital gains realized in certain investment accounts or vehicles. In addition to tax treatment, there are other wealth management and financial planning factors that play into strategic capital gains deployment. The below guide, while not all-inclusive, highlights some of the most basic capital gains considerations to discuss with your RKL Wealth Management advisor.
Tax rates for capital gains
Depending on filing status and taxable income, long-term capital gains are taxed at either zero, 15 or 20 percent, as displayed below.
- Zero percent: Married filing jointly taxpayers with taxable income less than $77,200 or single taxpayers less than $38,600 will pay no tax on long-term capital gains and qualified dividends in 2018.
- 15 percent: The 15 percent capital gains tax rate applies to taxable income between $77,200 and $479,000 (married filing jointly) or between $38,600 and $425,800 (single filers). Overall tax could rise to 18.8 percent when net investment income tax is factored in starting at modified adjusted gross income levels of $250,000/$200,000 for married/single.
- 20 percent: Capital gains are taxed at 20 percent for taxable income over $479,000 (married filing jointly) and $425,800 (single filers). This rate could increase to 23.8 percent when net investment income tax is applicable.
Tax planning opportunity: In years when income meets or falls below the zero percent threshold, consider selling out of holdings to divest or rebalance the portfolio or selling and buying back with higher cost basis with no current tax impact.
Handling capital gains (or losses)
Before year-end, take stock of year-to-date realized gains and losses from all taxable investment accounts. This inventory will provide a roadmap for harvesting additional gains or losses before the end of the year to meet investment, tax and financial planning goals. Below is quick overview of common situations and action items.
|Short and long-term losses?
|Selling securities (ideally short-term holdings) up to $3,000 less than the amount of losses to recognize unrealized gains.|
|More short-term gains than long-term losses? Equal
amounts of short and long-term gains?
|Taking losses up to $3,000 more than the net gain, starting with long-term positions, to offset short-term gains.|
|More long-term gains than short-term losses?
|Taking losses up to $3,000 more than the net gain – start with long-term positions, then move to short-term losses.|
|Bad debts or worthless securities?
|Working with your advisor to make sure that losses are deductible in the current year with the proper substantiation.|
Tax planning opportunity: Avoid capital gains tax on highly appreciated stocks held for more than one year by donating the appreciated security to a charity or donor-advised fund. This contribution deduction is based on the fair market value of the security, subject to certain limitations based on AGI.
Capital gains and your wealth management approach
When it comes to capital gains, the tax situation is only one piece of the puzzle. Don’t overlook cash flow needs, investment objectives, risk profile and legacy goals.
In order to meet cash flow needs, invested assets may need to be sold. When identifying the holdings for sale, individuals should think beyond tax impact and consider the overall impact to portfolio performance. If target allocation has significantly changed, portfolio rebalancing may be required. When considering the sale of securities or portfolio rebalancing, remain mindful of the level of risk and the time horizon for your individual investment needs.
A number of investment circumstances may also necessitate the deployment of capital gains. Over-concentration in one investment position may require diversification of holdings, while underlying investment costs may drive an investor to relinquish other holdings. As part of a routine investment analysis, your wealth advisor may recommend eliminating securities with poor performance. Other times, changes in fund manager, company strategy, legal/regulatory standing or company management may be the reason for a sale.
Legacy financial plans may include gifting appreciated stocks to family members. This strategy may also potentially shift the tax burden to a lower tax bracket. Keep in mind that kiddie tax rules have changed in 2018, thanks to tax reform, with unearned income subject to the estate and trust tax rates rather than the parent’s tax rates.
The team of advisors at RKL Wealth Management take a customized approach to developing and executing a capital gains strategy that meets your needs and goals. Contact them today to start a conversation about your unique financial circumstances.