If you hold investments outside of tax-advantaged retirement
plans, you may be able to take steps before year end to reduce your 2016 tax
liability.
Offsetting gains with losses
Suppose you’ve sold investments at a loss this year but you have
other investments in your portfolio that have appreciated. If you believe those
appreciated investments have peaked in value, you may want to sell them before
this year ends, at least to the extent that the gains from the sales will be
offset by your losses.
What if you’ve sold investments and are fortunate to have gains
this year? By the last business day of the year (Dec. 30 in 2016), consider
selling some losing investments to absorb the gains.
Tax rates to consider
At the federal level, long-term capital gains (on investments
held more than one year) are taxed at rates as high as 20% — 23.8% if you’re
subject to the net investment income tax. The short-term capital gains rate (on
investments held one year or less) is the same as the tax rate you pay on
ordinary income and can go as high as 39.6%.
The netting rules
Before taking action, you need to keep in mind the netting rules
for gains and losses, which depend on whether gains and losses are long term or
short term.
To determine your net gain or loss for the year, long-term
capital losses offset long-term capital gains before they offset short-term
capital gains. In the same way, short-term capital losses offset short-term
capital gains before they offset long-term capital gains. And you may use up to
$3,000 of total capital losses in excess of total capital gains as a deduction
against ordinary income in computing your adjusted gross income. Any remaining
net losses are carried forward to future years.
Start planning now
Careful handling of your capital gains and losses can save you
substantial amounts of tax. But make sure you fully understand all of the
implications for your tax and investment situation. Contact us if you have
questions.
© 2016
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