Year-End Tax Planning: 7 Strategies to Offset Capital Gains Taxes

November 16, 2022
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As you implement year-end tax planning strategies, the goal is always to reduce your taxable income. Your stock market portfolio could present some opportunities to decrease your 2022 income tax liabilities. Once you know the tax rules and how to apply the right strategies, you can take advantage of excellent tax benefits related to offsetting your capital gains.

Here are the basic goals you are looking to achieve:

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

Remember that you are paying taxes at a higher 71.4% rate when you pay at 40.8% rather than the tax-favored 23.8%. To avoid paying higher tax rates, here are seven tax planning strategies you can implement before the year comes to an end:

1. Unload Stocks

Examine your portfolio and identify stocks you want to unload. Make sales where you can offset short-term gains that are subject to a higher tax rate with long-term losses that offer a lower tax rate. Make those high taxes disappear and pocket the difference!

2. Use the Long-Term Loss Deduction

Use long-term losses to create the allowable $3,000 deduction against ordinary income. With this strategy, you are using the 23.8% loss to kill a 40.8% tax rate. Or, if you are in a lower tax bracket, you can use the 0% loss to kill the 12% tax rate.

3. Avoid the Wash-Sale Loss Rule

As an individual investor, you will want to avoid the wash-sale loss rule. Under this tax rule, you are allowed to sell a stock or other security. Then, you can purchase a substantially identical stock or security within 30 days (before or after the sale date). You won’t recognize the loss on that sale. Instead, the tax code makes you add the loss amount to the basis of your new stock.

If you want to use this loss in 2022, you will have to sell the stock and then wait at least 30 days before repurchasing that stock.

4. Create Offsetting Capital Gains

If you have a large amount of capital losses and/or capital loss carryovers and the $3,000 deduction is not enough, you should sell additional stocks, rental properties and other assets. This can help you offset your capital gains. If you sell stocks to purge capital losses, you can immediately repurchase the stock after you sell it. There is no wash-sale “gain” rule in this instance.

5. Give Appreciated Stock to Your Family

If you help support your parents’ retirement living expenses or children’s living expenses (those not subject to the kiddie tax), you can gift them appreciated stocks. This works well if they are in a lower tax bracket than you. You will be able to give them stock. They can then sell the stock and pay capital gains taxes on the stock sale at their lower tax rates.

6. Give Appreciated Stock to Charity

Another option with appreciated stocks is to use them for charitable donations. Giving stocks is better than cash because it offers you more tax benefits. First, you are able to deduct the fair market value of the stock as a charitable contribution. Second, you don’t have to pay any of the capital gains taxes you would have had to pay if you sold the stock yourself.

There are two rules to know here:

  1. Your deductions for donating appreciated stocks to 501(c)(3) organizations may not exceed 30% of your adjusted gross income (AGI).
  2. The tax law allows you to carry forward any donation that exceeds this 30% threshold—for up to five years

7. Don’t Give Loss-Deduction Stocks to Charity

If you are able to sell a publicly traded stock at a loss, do not give that stock to a charity (or your family members). Sell the stock yourself and then you will have a tax loss that you can deduct. A charitable contribution gives you no deduction for the loss. You only get credit for the current fair market value, which is less than you originally paid.

These are some year-end tax planning strategies you can implement if you want to offset capital gains on stocks, securities and other assets. For more tax planning guidance and wealth management support, contact Illumination Wealth today.