7 Year-End Tax Strategies for Your Stock Portfolio

November 24, 2021
  • facebook
  • linkedin
  • twitter
  • google plus

If you are looking to reduce your 2021 income taxes, you can look to your stock portfolio. There are ways to take advantage of current tax codes. Once you know the rules to the offset game, you’ll be able to apply the correct strategies and find tax benefits from your stock holdings.

There are two main goals with this year-end tax strategy:

  • Avoid high taxes (up to 40.8%) on short-term capital gains and ordinary income.
  • Lower the taxes to zero, or at least lower them to 23.8% or less by making the profits subject to long-term capital gains.

Essentially, you are looking to avoid paying higher taxes by dropping your income into a lower tax bracket. You could reduce your tax liabilities from 40.8% down to 23.8% or less.

Here are 7 possible year-end tax planning strategies we recommend to utilize your stock portfolio’s offset benefits:

Strategy #1: Unload Depreciated Stocks

Examine your stock portfolio for stocks that you want to unload. Make sales where you can offset short-term capital gains subject to a higher tax rate with long-term losses at a lower tax rate. Make the high taxes disappear by offsetting them with lower-taxed losses.

Strategy #2: Use Long-Term Losses

You can use your long-term losses to create the $3,000 standard deduction allowed against ordinary income. Again, you are trying to offset higher tax rates with these long-term losses taxed at a lower rate.

Strategy #3: Avoid the Wash-Sale Loss Rule

Under the wash-sale loss rule, you can’t recognize losses on a sale of a stock or other security if you purchase substantially identical stocks or securities within 30 days. If you want to use the loss in 2021, you will have to sell the stock and wait for at least 30 days before repurchasing that stock or a similar stock. Otherwise, the tax code makes you add the loss amount to the basis of your new stock.

Strategy #4: Create Offsetting Capital Gains

If you have significant capital losses in 2021 or capital loss carryovers from previous tax years, you can sell additional stocks, rental properties and other assets to create offsetting capital gains. If you are selling your stocks to purge capital losses, you can avoid the wash-sale gain rule and repurchase the stock immediately after selling it.

Strategy #5: Give Appreciated Stock to Family

If you give money to your parents or children to assist with living expenses (that is, children not subject to the “kiddie tax”), you should consider giving them tax appreciated stock(s). You can get a bigger bang for your buck if your parents or children are in lower tax brackets than you. A great strategy is to give them stock, have them sell the stock and then have them pay taxes on the stock sale at their lower rates.

Strategy #6: Donate Appreciated Stock to Charity

If you are planning to give to charity to offset your taxable income, consider giving appreciated stock rather than cash or other assets. Donating an appreciated stock gives you more tax benefits:

  • You deduct the fair market value of the stock as a charitable donation.
  • You don’t pay any of the taxes you would have to pay if selling the stock.

There are two important rules to know with this strategy:

  1. Your deductions for donating appreciated stocks to 501(c)(3) organizations may not exceed 30% of your adjusted gross income (AGI).
  2. If your stock donation does exceed the 30% threshold, don’t worry. The tax law allows you to carry forward the excess amount until used (up to five years).

Strategy #7: Don’t Donate Depreciated Stock to Charity

If you are able to sell a publicly traded stock at a loss, do not donate that stock to a 501(c)(3) charity as suggested above. If you sell this stock yourself, you will have a depreciation tax loss that you can deduct. If you give it to charity, you will get no deduction for your loss.

These are some effective year-end tax planning strategies that allow you to offset stock gains and losses. Reduce your taxable income for 2021 while improving your stock portfolio.

For professional guidance in investment management, tax planning and all aspects of wealth management, contact the team at Illumination Wealth today.