With the end of the year approaching, it’s a great time to think about your capital gains strategies to make the most of your tax situation. Capital gains are essentially the profits you make from selling things like stocks, real estate, or other investments. They play a significant role in financial planning and can have major tax implications if not managed wisely. By understanding the types of capital gains and how they are taxed, you could save quite a bit of your profits and better position your asset portfolio for 2025. If you’re already a little confused, please contact us and we’ll be happy to explain.
Types of Capital Gains and How They’re Taxed
There are two main types of capital gains to consider: short-term and long-term. Short-term capital gains are the profits made on the sale of assets you’ve held for less than a year. These get taxed as ordinary income, meaning you could pay tax rates as high as 37%.
On the other hand, long-term capital gains are the profits made on assets you’ve held for over a year. Depending on your income, they usually get taxed at much lower rates—like 0%, 15%, or 20%. If you’re a high earner, you might also have to deal with an extra 3.8% net investment income tax, but those long-term rates are still more favorable overall.
Year-End Capital Gains Strategies
While there’s still time left in the year to make adjustments, let’s review your investments and look for opportunities to maximize profits while minimizing tax liability. Here are some strategies to consider:
Harvest Losses
Tax-loss harvesting involves selling investments currently at a loss to offset capital gains from profitable investments. By “harvesting” losses, you can reduce or eliminate your capital gains tax. You may also be able to use extra losses to offset up to $3,000 of your ordinary income. Losses that exceed this can be carried forward to future tax years.
Rebalance Your Portfolio
Year-end rebalancing can allow you to manage your gains and realign your asset allocation to meet your financial goals. This may involve selling off assets that have appreciated substantially and could incur capital gains, but careful planning and loss harvesting can help minimize any tax impact.
Consider Holding Periods
Since long-term capital gains are taxed at a lower rate, holding onto assets until they cross the one-year mark can reduce your tax liability. If you are close to this threshold, it may be beneficial to delay selling until the asset qualifies for long-term treatment, saving on taxes.
Utilize Tax-Advantaged Accounts
Tax-advantaged accounts like IRAs, 401(k)s, or 529 plans allow investments to grow tax-free or tax-deferred, making them excellent options for sheltering capital gains from taxes. Consider using these accounts to reduce taxable profits when you rebalance your portfolio or sell high-performing assets.
Time Asset Sales to Match Income
Managing income in high-income years can be key to staying in a lower tax bracket for capital gains. For instance, if you expect to be in a lower tax bracket next year, you might defer selling an asset to qualify for a lower rate.
Donate Appreciated Securities
Instead of selling highly appreciated assets, consider donating them to charity. You’ll avoid paying capital gains tax and may qualify for a charitable deduction, which can offset other taxable income.
Capital Gains and the Broader Tax Picture
It’s crucial to look at the bigger picture regarding your taxes. Many of the strategies we discuss can affect other parts of your tax return. Talking with a tax professional or financial advisor before the year wraps up might be a good idea. We can help you find the right opportunities that fit your financial situation perfectly.
By using some of these year-end strategies, you can better manage your capital gains, which could help lower your tax burden. Plus, it ensures that your investments work for you and align with your goals.
Click here to book a no-obligation introductory meeting with our team to discover how Vita Financial can help you navigate the changing financial planning landscape.
