Jeff Deiss, CFP®, AEP, Wealth Advisor
by Jeff Deiss, CFP®, AEP, Wealth Advisor

CFP®, AEP, Wealth Advisor

Following up from last week’s commentary on Required Minimum Distributions, we’d like to point out that there is still time to harvest capital gains and losses before year-end, which is a classic year-end planning technique and one that we employ regularly at year-end for our clients with private taxable investment accounts.

2021 was a record year for realized capital gains, as a result of the run-up in the market following the COVID-19 outbreak.  Many taxpayers were caught off guard.   You would think this would not be the case given the downturn in the market during 2022, however, you may have realized gains earlier in the year and we are expecting that mutual funds will still be distributing capital gains over the next several weeks.

Capital gains can be a ‘wildcard’ in projecting your income for the tax year, which can impact your January estimated tax payment as well as your overall taxable income.

If you’ve realized significant gains this year, then harvesting unrealized losses (selling stocks that are down and buying them back after 30 days) can lower your modified adjusted gross income (MAGI), which is the basis for how much of your social security is taxed, what your Medicare Part B & Part D premiums will be in 2024, and whether or not your gains will be subject to the additional 3.8% Net Investment Income Tax (NIIT) along with other deductions and credits.  The NIIT is applied to the portion of your income from investments (capital gains, interest, dividends, rental income, etc.) when your MAGI exceeds $200,000 (filing individually) and $250,000 (filing jointly).

Remember, you normally use capital losses to offset capital gains, not to offset ordinary income (wages, interest, etc.), but you can apply up to $3,000 of excess losses against your ordinary income and carryover additional losses to apply against realized gains in future years.

You should coordinate the gains/losses realized on your ACM accounts with accounts that you hold elsewhere as well as any other assets you’ve sold this year (residence, business, etc.).

Please also note that, if you sell a stock to harvest the loss, neither you nor your spouse can buy the same stock back in another account or even in a retirement account within the 30 day period.  Doing so is known as “wash sale”, which will negate the loss you were attempting to realize.  Automatic purchases, contributions, rebalances and dividend reinvestments into a security you harvested a loss from may also inadvertently trigger a wash sale.

Also keep in mind that, if you are counting on receiving a dividend from a stock you own, then you may not want to sell that stock during the period when the dividend is expected to be paid.

Not everyone who has realized gains needs to go through the effort of realizing losses.  Single taxpayers, as well as those who are married filing jointly, are eligible to pay 0% on long-term capital gains and dividends depending on their taxable income.

 

If your taxable income falls into the 0% long-term capital gains bracket, then you may even be in a position to realize more gains for the current tax yea, rather than worrying about taking any losses.

You also don’t want to create more losses than you are able to use during your lifetime as they do not carry over to the next generation. If you planning to leave a stock to someone as an inheritance, then keep in mind that they receive a “step-up in basis” when they inherit the stock and the capital gain can typically be eliminated.

Lastly, keep state income taxes in mind when it comes to capital gains as well.  Most state tax capital gains as ordinary income and either limit (or disallow entirely) the ability to carry forward harvested losses into future tax years.

We’ll cover some additional year-end planning ideas over the next few weeks and, as always, please reach out to your ACM Wealth Advisor if you have any questions.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.