The Stock Market's Bumpy Year

With the stock market’s bumpy year so far… 

Closely review your investment portfolio to take advantage of some tax-savings opportunities and to try to avoid some potential tax traps. 

Consider selling the duds in your portfolio to offset capital gains from sales of winners. But beware of the sneaky wash-sale rule. If you purchase substantially identical securities up to 30 days before or after the sale, the capital loss is not deductible. Any suspended loss is added to the tax basis of the replacement securities. 

The wash-sale rule can catch you by surprise. For example, if you buy stock in an IRA after selling the same stock at a loss in your taxable investment account, or if you sell a mutual fund at a loss 25 days after the date a dividend is reinvested. Note that the rule doesn’t apply to trades made completely within an IRA. You are fine if you sell securities in your IRA at a loss and buy them back in the IRA within 30 days. 

 Watch out for stock mutual funds that frequently buy or sell holdings.

They can potentially generate big short-term capital gains distributions, which are taxed at ordinary income rates instead of the more favorable long-term capital gains rates. Before you invest in a mutual fund, check its turnover ratio. The higher the ratio, the higher the potential for tax-inefficient short-term capital gains distributions. 

 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 $41,675 on single returns…$55,800 for head-of-household filers or $83,350 on joint returns…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. But the 0% rate isn’t all gravy. Zero-percent-rate gains and dividends might not be taxed at the federal level, but they do hike adjusted gross income. The extra AGI can cause more of your Social Security benefits to be taxed. Also, your state income tax bill may jump, since many states tax gains as ordinary income. 

 A Senate GOP proposal would let even more people qualify for the 0% rate.

The new bill would expand the 0% rate on long-term capital gains and dividends to align the income levels with the top of the 22% federal income tax bracket. For 2022, for instance, that would mean the income threshold amounts would increase to $89,075 on single returns, $89,050 for head-of-household filers and $178,150 on joint returns. It would also hike the income levels for the 3.8% net investment income tax, which now impacts single filers with modified adjusted gross income over $200,000 and joint filers with MAGIs in excess of $250,000. The bill would raise the threshold for joint filers to $400,000 and index both income thresholds to inflation each year. The odds of enactment are low to none right now. But keep an eye on it. The bill is generating lots of buzz and will come up again, especially if the economy continues to slump or a Republican can take back the White House in 2024.