Year End Tax Savings
Take a look at your investment portfolio. You have lots of tax-savings opportunities in the coming months as the year’s end approaches.
Consider getting rid of poor performers. Capital losses you incur can offset your capital gains plus up to $3,000 of other income. Any excess losses are carried forward and can help offset future gains.
If you have capital loss carry-forwards… Cull your portfolio for gains. Your net gains, up to the amount of the loss carryover, won’t be taxed.
See if you’re eligible for the 0% rate on long-term gains and qualified dividends. If taxable income other than long-term gains or dividends does not exceed $40,400 on single returns…$54,100 for heads of household and $80,800 for joint filers…then your qualified dividends and profits on sales of assets owned more than a year are taxed at a 0% federal rate until they push you over the threshold amounts.
Here are three scenarios to illustrate the rules. In the following examples, you have a married couple with $10,000 of qualified dividends and long-term gains, which are included in taxable income. In the first example, the couple has $65,000 of taxable income. The full $10,000 of gains and dividends is taxed at the 0% rate. Let’s now assume the couple has taxable income of $88,000. $2,800 of the gains and dividends ($80,800 - ($88,000 - $10,000)) gets the favorable 0% tax rate, and $7,200 is taxed at 15%. If the couple instead has $110,000 of taxable income, the 0% rate doesn’t apply and the full $10,000 of gains and dividends is taxed at 15%.
Some words of caution on the 0% rate. Zero-percent-rate gains and dividends might not be taxed at the federal level, but they do hike adjusted gross income. Also, your state income tax bill may rise, as many states tax gains as ordinary income.
Take steps to limit the sting of the 3.8% surtax on net investment income. Singles with modified AGIs over $200,000…$250,000 for couples…could owe the tax. It’s due on the lower of NII or the excess of modified AGI over the thresholds. Be sure to factor in the odds of tax changes, as congressional Democrats continue to negotiate among themselves on the size of a reconciliation package and any tax increases and tax breaks that could potentially be included in it. It’s still too early to tell whether the Democrats can eventually agree on the scope of a bill, but if they can, it’s a good bet there will be some tax hikes for the rich.
Democrats want higher capital gains taxes for upper-income individuals. A House plan would hike the top rate on long-term gains from 20% to 25%. President Biden originally called for taxing capital gains of millionaires at a 39.6% rate, but he seemed to back off this and is now supporting the House proposal. His idea to tax unrealized capital gains at death has also lost steam among some in his party. The 25% rate is proposed to apply to capital gains after Sept. 13, 2021. Most other tax increases that Democrats are calling for would begin in 2022.
Reach out to our team of strategists to learn more about end of year tax savings for 2022. Time is ticking.