Before you know it, the yearend will be on the horizon. And that may raise questions about selling stocks and harvesting gains -- if you still have them! The time to take a look is now, so you can offset gains and losses and pay the lowest amount of taxes.
Tax issues don't apply to stocks or mutual funds held inside qualified retirement accounts, such as IRAs, 401(k) plans and 457 plans. All withdrawals from those plans are taxed as ordinary income at your then-current rate (except for Roth withdrawals, which are tax-free).
Some of the basic rules of capital gains taxation are complicated, so discuss any decisions with your tax adviser. But here are five things to keep in mind.
1. Capital gains tax treatment. If you have held an asset for longer than one year, then you receive a preferential long-term capital gains tax rate when the property is sold. If held for less than one year, it is considered a short-term capital gain (or loss). The amount of the gain is calculated based on the difference between the cost basis and the price of the sale. Cost basis, according to the IRS, is "the amount of your investment in property for tax purposes." It may be impacted by things like depreciation and capital improvements, but in the simplest cases, such as stocks, it's the difference between the purchase price and the price of the sale.
2. Taxes on capital gains. Tax rates on capital gains are determined by your tax bracket, but a significant number of people will actually pay no capital gains tax on the sale of assets held over a year! The maximum capital gain tax rate is 20 percent. But those in the 10 percent and 15 percent income tax brackets pay zero capital gains taxes. For 2015, that group includes singles with less than $37,450 in taxable income or joint filers with taxable income under $74,900.
3. Netting gains and losses. If you have some long-term capital losses as well as gains, and you establish that loss in the same year, then you are taxed on the "net gain" -- the difference between gains and losses. That's why you should review your portfolio not only for gains, but for losses to offset those gains. If you sell a stock to establish a loss, but still want to own it, you must wait 30 days to repurchase it or the loss will be nullified.
4. Deducting Losses. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year per person, or $1,500 if you are married and file a separate return. Any excess losses can be carried forward to future years. But you cannot deduct losses on the sale of property that you hold for personal use, such as your home or car.
5. Special Tax Rates for Home Sales There is a special exclusion of $250,000 in gains per person on the sale of a personal residence. So a couple filing jointly and selling their long time residence could exclude $500,000 of gains on a one-time basis. Details apply, as they say in the commercials, so check with your accountant to make sure you qualify.
It's never a good idea to buy or sell investments solely for tax purposes; however, you should never ignore the tax consequences of your decisions. For example, a low-income retiree might want to delay withdrawals from an IRA, which would boost taxable income, and instead sell stocks with gains, which may incur no capital gains taxes.
It's worth discussing taxes with your advisor before year end. Zero taxes on stock gains are within reach of many. And that's The Savage Truth.