Some Important Capital Considerations

Capital gains taxes often amount to a sizable part of an individual’s tax burden. With this being the case, it is important for taxpayers to be familiar with the various tax planning strategies that are available for reducing the impact of capital gains taxes on the overall tax obligation. Although these strategies are important all year long, they are especially important during the fourth quarter when there is still time to make certain tax saving moves that will reduce tax dollars owed for the current year. Such moves include the pairing and timing strategies discussed below in addition to certain more sophisticated moves most often used by high income individuals or those who have experienced a significant taxable event.

Pairing Strategies

Capital gains can be used to offset ordinary income and/or capitals losses according to certain IRS guidelines described below.

·        Up to $3000 in capital losses can be used to offset ordinary income with the ability to carry forward into future tax years any capital losses that are not used to offset capital gains.

·        Since long term capital gains tax brackets range from 0% to 20% (to be indexed for inflation after 2018) while ordinary income tax brackets range from 0% to a high of 39.6%, the greatest tax advantage is obtained by pairing capital losses with ordinary income up to the $3000 limit.

·        Capital losses in excess of $3000 are used to offset capital gains, with short term losses used to cancel short term capital gains and long term capital losses used to offset long term gains. Once this is accomplished any leftover gains or losses are simply paired against each other.

·        Since short term capital gains are taxed as ordinary income rather than at the lower capital gains tax rates, assets that have realized a gain should be held a minimum of twelve months whenever possible.

Timing Strategies

Because capital gains tax rates are based on income, timing can be an important consideration in realizing capital gains and losses, especially when an expected increase or decrease in income is on the horizon.

·        A taxpayer who expects to realize a net capital loss for the year would probably want or realize that loss in the current tax year if a decrease in income is projected for the upcoming year. If an increase in income is projected, the loss might be better realized in the current year. These considerations are typically less critical for long term capital gains where the income limits for the various tax brackets are much broader than those for ordinary income.

·        In the same way, taxpayers who are expecting to realize a net capital gain would want to realize the gain in the current tax year when an increase in income is projected and in the next year if a decrease in income is projected. Again, for long term capital gains, these considerations are only important when the gain would push the taxpayer into the next higher capital gains tax bracket. 

·        A final timing consideration comes into to pay with respect to the Net Investment Income Tax that is still in effect. This surtax of 3.8% applies to the lesser of net investment income for the year or the amount by which the taxpayer’s adjusted gross income exceeds the threshold of $200,000 ($250,000 for a married couple). Timing decisions related to the realizing of capital gains should attempt to avoid this extra tax whenever possible.

The Certified Public Accountants and Enrolled Agents Los Angeles Bookkeeping are familiar with all of various tax planning strategies available for reducing capital gains taxes and are prepared to help each client apply them to achieve the maximum tax advantage possible for their specific situation. Don’t delay! Contact the tax professionals at Los Angeles Bookkeeping today discuss possible year-end tax planning strategies. Schedule a free, no obligation consultation by emailing us at james@labookkeeping.com or calling us at (714) 509-5683.