How To Minimize Taxes On Stock Gains

How Do I Calculate My Basis In A Capital Asset

For most assets, your basis is your capital investment in the asset. For example, it is your purchase price plus additional costs that you incurred, such as commissions, recording fees, or transfer fees. Your adjusted basis can then be calculated by adding to your basis any costs that youve incurred for additional improvements and subtracting depreciation that youve deducted in the past and any insurance reimbursements that have been paid out to you.

Avoid Capital Gains Tax On Shares By Giving Appreciated Stock To Anyone

Second, the Internal Revenue Service allows you to give away a certain amount of money each year to anyone. And the individual or individuals do not have to be qualified charities.

Yes, you can give appreciated stock to a child, parent, friend, or total stranger. And you can do so for as many people as you choose.

As of the date of this post, the annual amount is $16,000. However, tax laws generally increase this value over time.

As a result, you the donor will pay no capital gains tax.

But the recipient will inherit your cost basis. Thus, when they go to sell, they may have to pay capital gains tax.

This is an especially desirable financial result if you give the stock to someone who has little or no income. Because they may qualify for the zero capital gains tax rate. See point number 1 above.

Regular readers know that Im a long-term investor. Since I like to buy and hold my dividend stocks forever. Maybe this next point takes my investment philosophy a little too far.

I dont know. Thats for you to decide.

However, its another way to avoid tax on stock gains

Take Advantage Of Tax Loss Harvesting

Tax loss harvesting is a strategy that involves selling securities at a loss to offset the amount of the gain you realized on other investments that you sold. This strategy helps reduce your overall tax liability because the loss can help cancel out the gain.

Suppose you invest $1,000 in Fund A and $1,000 in Fund B. One year later, you sell Fund A at $1,300 and Fund B at $500. You realized a gain of $300 with Fund A and a loss of $500 with Fund B. You wouldnt owe any tax on the gain, because you lost more than you gained. That amount can also help you reduce your taxable income.

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Relieve The Highest Cost Basis

Another way to lower the capital gains tax is to wisely select the cost relief method to apply to the stocks sold.

Each purchase transaction is its own separate tax lot. So if I made two separate purchases of Apple , I can select to relieve the one in May with the higher cost basis to reduce my overall capital gains.

Brokerage firms are now required to report the cost on the stocks sold. Just understand that the cost relief method set by the brokerage firm is set to a default arrangement.That default arrangement can be modified by you in order to give you the lowest capital gains tax.

If you are only selling some of the shares in a particular stock, see if you have purchased them at different times which resulted in different tax lots. If yes, then it is best to select the most advantageous tax lot to relieve.

Gift The Stock And Then Sell

The IRS allows the gifting of up to $15,000 per person without incurring any gift tax. Even if the gift exceeds $15,000, the excess amount is applied against the estate tax exemption.

If a stock is gifted to a person in a lower tax bracket and then sold by that person, the person might not be subject to any capital gains tax depending on income.

The cost basis and holding period carry over to the recipient of the gift.

In situations where you might feel inclined to financially support your adult children, gifting them appreciated stocks held for over a year might be a smarter tax move than providing them with cash.

The $15,000 amount is per recipient and per gifter. That means if you are married, you can gift $30,000 to a single person without the need to dip into your estate exemption amount

It also means if you have two adult children, you and your spouse can give $30,000 to each for a total of $60,000.

They can then sell the stocks and the gains will be taxed at their tax bracket instead of yours.

This approach might actually come in handy for me.

I might be able to gift some of my stocks to my siblings who are at a lower tax bracket than me resulting in some tax savings.

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Net Investment Income Tax

In addition to regular capital gains tax, some taxpayers are subject to the net investment income tax. It imposes an additional 3.8% tax on your investment income, including your capital gains, if your modified adjusted gross income is greater than:

• $250,000 if married filing jointly or a qualifying widow with a child
• $200,000 if single or a head of household
• $125,000 if married filing separately

Will Capital Gains Tax Rates Change For 2022

Capital gains tax rates are the same in 2022 as they were in 2021: 0%, 15%, or 20%, depending on your income. The higher your income, the higher your rate. While the tax rates remain unchanged for 2022, the income required to qualify for each bracket goes up to adjust for inflation. The maximum zero-rate taxable income amount is $83,350 for married filing jointly and surviving spouses, $55,800 for heads of household, and $41,675 for married filing separately taxpayers.

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Max Out Your Tfsa Portfolio And Buy And Hold The Rest

Tax-free savings accounts are the only totally tax-free accounts available to Canadian investors.

Offering both tax-free growth and withdrawal, they give you a double whammy of tax savings. Granted, the TFSA contribution limit is fairly low.

If you have a fair amount of disposable income you wont be able to put all of your investments in a TFSA. However, you can minimize your non-TFSA tax burden too by buying and holding dividend stocks for your non-TFSA portfolio, so you never cash out a capital gain. That way, the only tax you have to pay is the dividend tax, which has a generous credit applied to it.

How To Minimize Or Avoid Capital Gains Tax

Now you have an idea of what assets to be wary of, youll need to build a strategy that incorporates this tax and other state taxes and regulations on top of this. Where do you begin?

Below we have some common methods that you might want to consider, but before you make any big decisions, you may want to consult advice from a tax advisor so they can put you on the right path.

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How Stocks Are Taxed

The IRS taxes individuals for earned and unearned income. Earned income comes from things like your wages, salary, or tips. Unearned income comes from the gains you make from the sale of stocks and even dividends you are paid. Yes, not even dividend investors will escape the Eye of Sauron that is the IRS.

While some of the top stock brokers dont charge investors commissions, taxes are unavoidable. Uncle Sam dipping into your profits can seriously suck, but the upside is the costs can be calculated and prepared for.

Stocks are going to be taxed based on the gains they generate. If you saw your holdings appreciate in 2020 and then sold them for more than you paid for them, thats again you will owe taxes on the profits.

Capital gains tax rates are categorized as either long-term or short-term. Generally, long-term investments are those that have been held longer than 365 days and they have a lower tax rate than earned income and short-term investments.

How To Avoid Capital Gains Tax In Canada

In Canada, there are a variety of legal ways to avoid paying capital gains tax. As detailed in this article, six of them are to put your earnings in a tax shelter offset capital losses defer capital gains take advantage of the lifetime capital gain exemption donate your shares to charity and use the capital gain reserve.

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Wait Longer Than A Year Before You Sell

Capital gains qualify for long-term status when the asset is held longer than one year. If the gain qualifies for long-term status, then you qualify for the lower capital gains tax rate.

Long-term capital gains tax rates depend on your filing status and your total long-term gains for the year. For 2021, the long-term capital gains tax brackets are as follows:

In addition to the rates above, high-income taxpayers may also have to pay the Net Investment Income Tax on capital gains. NIIT applies an additional 3.8% tax on all investment income, including capital gains. NIIT applies if your income is above $200,000 for single and head of household taxpayers and $250,000 for married couples filing a joint return.

As you can see, the difference between a long-term sale and a short-term sale can be significant. To illustrate, say you are a single person with a total taxable income of $39,000. You sell stock that results in a $5,000 capital gain, here is the difference in tax if the gain is short- or long-term:

• Short-Term , Taxed at 12%: $5,000 x 0.12 = $600
• Long-Term , Taxed at 0%: $5,000 x 0.00 = $0.

Holding the stock until it qualifies as long-term would save you $600. The difference between short- and long-term can be as little as one day, so be patient.

Locking In Gains Is Good But What About My Large Tax Bill On The Gains

I have stocks in both tax deferred accounts plan) and taxable accounts such as a personal trading account with an online brokerage firm.

If I do end up selling my stocks in a taxable account, I will be hit with a substantial tax bill.

The Federal government imposes a capital gains tax on the gains generated from the sales of stocks.

The holding period of the stock determines if the gains are subject to a long term capital gains tax or a short term capital gains tax.

Short term capital gains are applied to a stock held for one year or less. The gains are added to your ordinary income and taxed at your marginal tax rate

Long term capital gains are applied to a stock held for longer than one year. The Federal government wants to incentivize people to hold stocks for longer than a year.

The tax rates are lower on long term capital gains.

There is also the Net Investment Income Tax for high income earners at 3.8%. This is in addition to the long term capital gains tax.

Therefore, the highest rate on long term capital gains + the NIIT is 23.8%.

I live in New York City. There is also tax on realized stock gains at the state and local level.

When it is all said and done, I can expect to pay an all-in tax rate of around 35% on long term capital gains.

I am always one who likes to drive down my expenses. Taxes are definitely my single biggest expense.

I started researching ways to help reduce my tax bill if I do end up selling appreciated stocks with unrealized gains.

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Move To A Tax Friendly State Before Selling

This tax strategy can help lower your capital gains tax on stock sales if you plan to move to a different state within the near future.

New York City has some of the highest taxes in the United States given both the state level tax along with the city level tax.

The New York tax rates can run north of 10% combined.

Selling appreciated stocks while living in New York City results in an additional 10% of income taxes on the gains.

Instead of selling stocks while living in New York, I can wait until I move to a tax friendlier state preferably one of the 9 states without income tax.

I dont expect to move out of New York City anytime soon, so this becomes a difficult strategy for me to implement.

How Capital Gains Are Taxed Depends On Your Total Income

Returning to the earlier example, say your $10,000 capital gain qualified for long-term treatment. Your total taxable income is still $82,600. However, your tax calculation is different.

Your ordinary income is $72,050 . You are still in the 22% tax bracket, and calculate your ordinary income tax as follows:

• 10% of the first $10,275 of income: $1,028
• 12% of the next $31,499 of income: $3,780
• 22% of the last $30,276: $6,661

For long-term capital gains, you fall into the 15% tax bracket, so you calculate your long-term capital gains tax as 15% of $10,000: $1,500.

For 2022, your tax bill is roughly $12,969.

Having your capital gain taxed at long-term rather than short-term rates results in $700 of tax savings.

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Using Tax Loss Harvesting

One of my favorite ways to avoid paying capital gains taxes is a strategy called tax loss harvesting. Essentially, this is where you sell investments at a loss to offset gains from other investments. For example, lets assume youve sold a stock and received $10,000 in gains. However, in the same portfolio, you have a stock that has lost $10,000. By selling that losing stock, youre able to offset the gain on which you would have paid taxes.

Its important to note that in order for tax loss harvesting to work for you, you and your tax planner have to monitor your tax liabilities throughout the year. For instance, you may not need to sell losing stocks every year. Your taxable income could be below the $80,800 threshold even when earning capital gains on non-qualified investments.

On the other hand, if you and your tax adviser see that your taxable income could be above the threshold and youre earning capital gains by selling investments, tax loss harvesting might be an effective way of offsetting your gains to qualify for that 0% capital gains tax.

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What Are The Types Of Income You Pay Capital Gain Tax In Canada

The types of income on which you pay capital gains tax in Canada are income from shareholder dividends income from the sale of stocks or property and income from gifts of capital if those gifts produce income. Income of all of these types is considered taxable to some extent at a given taxpayers income tax rate for the year in question.

Control Your Asset Location

To start, let’s give a quick refresh on capital gains tax.

Capital gains tax is a specific type of federal tax incurred on the sale of the investment. There are two types:

If you hold an investment for less than a year, your investments will be taxed at short-term capital gains rates, which end up being the same as ordinary income tax rates.

But holding assets can come with significant tax benefits. By holding an asset for a year or more, you qualify for long-term capital gains tax rates, which are much more favorable , either 0%, 15%, or 20% depending on your income for the year.

Now, let’s begin to look at how taxpayers can mitigate them. The first and most critical part of mitigating capital gains tax is to ensure your assets are in the right accounts. This strategy is known as asset location or putting different securities in the most tax-efficient accounts for that particular investment.

Tax-advantaged accounts, both pre-tax and Roth, like 401s, IRAs, HSAs, and other retirement accounts, are powerful tools for shielding your investments from capital gains taxes and lowering your taxable income but you don’t want your entire portfolio squirreled away within them. Given that each type of tax-advantaged account has contribution limits, you may not be able to put your entire savings into them anyway.

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What Are Capital Gains Taxes

Capital gains as they pertain to stocks occur when an investor sells shares of an individual stock, a stock mutual fund, or a stock ETF for more than they originally paid for the investment. For example, if you buy 100 shares of a stock at $25 per share and later sell them for $40 per share you will have realized a capital gain of $15 per share or $1,500 total on the 100 shares.

ETFs and mutual funds can also incur capital gains realized from the sales of the stocks held within the mutual fund or ETF.

The Internal Revenue Service defines capital gains as either short-term or long-term:

• Short-term capital gains: Capital gains on stocks that are held for less than one year are taxed at your ordinary income tax rate. There is no different treatment for tax purposes.
• Long-term capital gains: If the shares are held for at least one year, the capital gain is considered to be long-term. This means the gain is taxed at the long-term capital gains tax rate, which is lower than the ordinary income tax rates for many investors.

Note: Capital gains on stocks are taxed differently than capital gains on a home sale.