Capital gains – losses and the tax treatment of them can be a significant planning consideration. The careful handling of capital gains and losses can save taxes. For the educated in tax compliance and planning, this is an obvious tax planning strategy. However, it is one that is commonly overlooked. We at Fragnoli & Company CPAs, in Brentwood, TN and Hendersonville, TN believe that tax planning is one of the most critical services we offer our clients. Following is an excellent article from Accounting Today that I feel expresses this strategy simply and effectively the planning around capital gains – losses.
Individuals who lost money in the stock market in 2014 may have other investment assets that have appreciated in value. These taxpayers should consider the extent to which they should sell appreciated assets before year end (if their value has peaked) and thereby offset gains with pre-existing losses.
Long-term capital losses are used to offset long-term capital gains before they are used to offset short-term capital gains.
Similarly, short-term capital losses must be used to offset short-term capital gains before they are used to offset long-term capital gains. Noncorporate taxpayers may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing adjusted gross income.
For 2014 and 2015, a noncorporate taxpayer is subject to tax at a rate as high as 39.6 percent on short-term capital gains and ordinary income. Long-term capital gains are taxed at a rate of
• 20 percent if they would be taxed at a rate of 39.6 percent if they were taxed as ordinary income;
• 15 percent if they would be taxed at above 15 percent but below 39.6 percent if they were taxed as ordinary income; or
• 0 percent if they would be taxed at a rate of 10 percent or 15 percent if they were taxed as ordinary income.
Note that for purposes of the 3.8 percent Net Investment Income Tax under Section 1411, net investment income includes the net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property, other than property held in a trade or business to which the NIIT doesn’t apply, minus the deductions that are properly allocable to that net gain. Gains taken into account in computing NII (to the extent not offset by capital losses) include gains from the sale of stocks, bonds, and mutual funds and capital gain distributions from mutual funds.
Restricting annual payouts from retirement plans and IRAs to the required minimum distribution (and taking cash from other accounts as needed) may help some taxpayers to take advantage of a lower capital gains rate. Note, however, that gain on the sale of collectibles or Section 1202 stock is taxed at the lesser of 28 percent or the rate at which it would be taxed if it were taxed as ordinary income, and unrecaptured Section 1250 gain on the sale of depreciable real property is taxed at the lesser of 25 percent or the rate at which it would be taxed if it were taxed as ordinary income.
How to Make the Most of Losses
A taxpayer should try to avoid having long-term capital losses offset long-term capital gains since those losses will be more valuable if they are used to offset short-term capital gains or ordinary income. To do this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains are taken. However, this is not just a tax issue. As is the case with most planning involving capital gains and losses, investment factors need to be considered.
If you are interested in reviewing your gains and losses inside your investment portfolio (realized and unrealized), or would like to discuss the volumes of other tax strategies we at Fragnoli & Company, CPAs utilize, please feel free to contact us at (615) 377-0705. Remember, tax planning is where we can make our Firm a profit center versus a cost.