Tax Strategies for Your Stock Portfolio - Philadelphia CPA
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Tax Strategies for Your Stock Portfolio

Tax Strategies for Your Stock Portfolio

With the end of the year approaching, I would like to review how you can make use of your stock portfolio to lower your tax bill. I will briefly discuss seven tax strategies that you can use to your advantage.

 

First, let’s go over some background information. Your short-term capital gains are taxed like ordinary income. This means you pay federal taxes at rates of up to 43.4 percent: the top income tax rate of 39.6 percent plus the 3.8 percent Affordable Care Act tax on investment income. You pay taxes on your long-term capital gains 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 zero 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 23.8 percent or even the 0 percent rate when possible.

 

  1. Use Low Taxes to Offset High Taxes

 

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). With this, you offset the gains with the losses.

 

In other words, make the high taxes disappear by offsetting them with low-taxed losses, and pocket the difference.

 

  1. Use Losses Against Ordinary Income

 

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.

 

  1. Use Extra Losses as an Opportunity for Free Gains

If you have plenty of capital losses, use this opportunity to sell some capital gains assets so as to create tax-free gains. For example, sell additional stocks, rental properties, and other assets to generate gains that offset your capital losses.

 

  1. Avoid Wash Sales

Under the wash-sale rule, if you sell a stock or other security and you purchase substantially identical stock or securities within 30 days before 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.

 

  1. Gift Stock Instead of Cash

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.

 

  1. Donate Stock to Charity

Similarly, you should consider donating appreciated stock to charity instead of cash. You get a big benefit at a low cost using this strategy because

 

  • you deduct the fair market value of the stock, and
  • you don’t pay taxes on the gain.

 

  1. Never Donate Loser Stocks

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.

 

Please contact me if you would like to discuss any of the strategies above. I look forward to hearing from you.

 

Sincerely,