By The Welch Group
As you plan out your comprehensive, diversified financial strategy, taxes will always be a consideration. Capital gains taxes are taxes you pay on the gains of your investments, such as if your home increases in equity or your investments increase.
How much you pay in capital gains taxes depends on how long you hold your investments. Having an investment for a year or less will trigger short-term capital gains taxes, which are taxed as ordinary income, as high as 37% in some cases. Long-term capital gains taxes are based on your income and are taxed at 0%, 15%, and 20%.
While the simplest way to pay lower capital gains taxes is to hold your assets for more than a year, there are other strategies to prevent taxes from eating away at your wealth.
Let’s look at three ways you can help minimize your capital gains tax liabilities.
1. Take Advantage of Tax-Deferred Saving Accounts
Saving for retirement is one way to avoid taxes on capital gains. With tax-deferred accounts (think IRAs and 401(k)s), you’ll only pay ordinary income tax when you withdraw the money, and you won’t face capital gains taxes on the growth. The same goes for Roth IRAs. Not only will you benefit from avoiding income taxes on the withdrawal if you are 59½ and have held the Roth for more than five years, but you’ll also avoid capital gains taxes.
2. Plan Out Your Gains & Losses
Not all your stock picks are going to provide growth, and there may be times when you have to make some tough decisions about your portfolio. Tax-loss harvesting is a strategy that allows you to offset your capital gains by capital losses. If you own a losing bond, mutual fund, or stock in accounts other than your 401(k) or IRA, review your realized and unrealized gains and losses. You might be able to offset some of your gains by selling some losses, thus lowering your taxable income. And if you live in a high-tax state, you may want to defer tax by deducting up to $3,000 of capital losses in excess of capital gains and carrying any leftover capital losses forward into future years.
Cost basis is another piece of the capital gains tax puzzle to keep in mind. Cost basis is the amount you paid for your asset. There are many ways to decide what cost basis to use if you have multiple asset purchases in different periods. Most investors use the first-in, first-out method (FIFO), but there are other methods, such as last-in, first-out (LIFO) and average cost. Be sure to consult your financial advisor before taking advantage of this option.
3. Check the Tax Implications of Your Assets
If the asset in question is real estate, you may be in luck. Currently, homeowners can sell and exclude up to $250,000 (for single tax filers) or $500,000 (for those who are married filing jointly) of the gains if you owned the property and lived in the house for at least two of the five years prior to selling it. Even better, you can claim this exclusion on another property in the future as long as it’s been more than two years since you previously claimed it.
Business profits are also excluded from capital gains tax and instead are subject to business tax rates. In general, capital gains taxes apply to the sale of personal assets. Your business income is reported differently on your tax return and won’t face capital gains taxes.
Strategically Planning Your Capital Gains
Although there are many alternative strategies for those who want to offset or defer capital gains taxes or need to structure their income in a way that minimizes taxes, as with anything related to taxes, this can get complicated quickly. Luckily, you don’t have to figure it out alone.
We would love to talk to you further about your investments, their tax implications, and how you can structure your investments to be most advantageous for your goals. Schedule an introductory phone call by reaching out to us at 205-879-5001 to learn if we are the right fit for your financial journey.
About The Welch Group
The Welch Group is a fee-only, employee-owned wealth management firm committed to enriching the lives of its clients. Founded in 1984, The Welch Group helped pioneer the fee-only financial planning and investment management movement and has continued to put the needs of clients first ever since. Offering wealth management and family office services to retirees and young professionals, The Welch Group team strives to simplify financial management and help clients secure their financial future so they can focus on what matters most. Our personalized and comprehensive approach helps clients plan for their goals, needs, and concerns, including estate planning, cash flow, charitable and tax planning, and retirement strategies.
As financial advocates, the financial advising team is made up of educated, experienced, and dedicated professionals, including Certified Public Accountants, a Juris Doctorate (JD), individuals with MBA degrees, and CERTIFIED FINANCIAL PLANNER™, Accredited Estate Planner®, and Chartered Financial Analyst® professionals. The Welch Group is passionate about giving back and creating positive ripple effects in our community by supporting local charitable organizations through The Welch Group Foundation. To learn more about what we do and how we can help, explore our website and schedule a complimentary consultation.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Welch Group, LLC [“Welch”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Welch. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Welch is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Welch’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.welchgroup.com. Please Note: Welch does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Welch’s website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.