Did you make investments outside of tax-advantaged retirement plans? If so, you may still have time to shrink your 2018 tax bill by selling some investments—you just need to select which investments you sell carefully.
Try balancing gains and losses
If you have sold investments at a gain this year, consider selling some losing investments to absorb the gains. Doing this is commonly referred to as “harvesting” losses.
If, however, you have sold investments at a loss this year, consider selling other investments in your portfolio that have appreciated, to the extent the losses will absorb the gains. You will lock in the peak value and avoid tax on your gains if you believe those appreciated investments have peaked in value.
Review your possible tax rates
At the federal level, short-term capital gains (on investments held at one year or less) are taxed at higher rates than long-term capital gains (on investments held over a year). The Tax Cuts and Jobs Act (TCJA) retains the 0%, 15% and 20% rates on long-term capital gains. However, for 2018 through 2025, these rates have their own brackets, instead of aligning with various ordinary-income brackets.
For instance, these are the thresholds for the top long-term gains rate for 2018:
• Singles: $425,800
• Heads of households: $452,400
• Married couples filing jointly: $479,000
However, the top ordinary income rate of 37%, which also applies to short-term capital gains, does not go into effect until income exceeds $600,000 for joint filers or $500,000 for singles and heads of households. The TCJA also retains the 3.8% net investment income tax (NIIT) and its $200,000 and $250,000 thresholds.
Do not forget the netting rules
Before selling investments, think about the netting rules for gains and losses, which depend on whether gains and losses are short term or long term. If you want to determine your net gain or loss for the year, short-term capital losses offset short-term capital gains before they offset long-term capital gains. Similarly, long-term capital losses offset long-term capital gains before they offset short-term capital gains.
You might use up to $3,000 of total capital losses in excess of total capital gains as a deduction against regular income in calculating your adjusted gross income. Then any remaining net losses are carried forward to future years.
Time is running out
By selling certain investments by year end and reviewing your investment activity year-to-date, you might be able to reduce your 2018 taxes significantly. But you need to act soon, because time is running out.
Consider that tax considerations should not drive your investment decisions. It would be best if you also thought about other factors, such as your risk tolerance and investment goals.
Contact us so we can help you determine what makes sense for you.