Tips to Reduce Capital Gains Tax 

By Brett Gottlieb

Profiting through your investments is no easy task, and you may have felt frustration when your hard-earned profits get reduced by capital gains taxes. While completely avoiding these taxes probably isn’t possible for most everyday investors, you can make strategic adjustments to potentially qualify for meaningful tax deductions. Here are four tips to help reduce your capital gains tax bill and keep more of your savings and profits.

1.   Wait a Little Longer to Sell

Timing the sale of your investments is critical to lowering your capital gains taxes. Selling your shares after holding for less than a year will result in a short-term capital gains tax. This means that all the gains you made from the sale of the stock will be taxed at your ordinary income rate, which can be 32%-37% for high-earners. Holding on to an asset for more than one year will be taxed at the long-term capital gains tax rate, which can be 0%, 15%, or 20%.

Holding periods are also critical when it comes to the sale of real estate. If you sell your primary home and you lived in the home for at least two years of the five-year period before the sale, the IRS allows you to exclude the first $250,000 of capital gains (or $500,000 for a married couple filing jointly). While the capital gains exclusions do not apply to investment properties, you may be able to utilize like-kind exchanges to defer capital gains tax by reinvesting in other real estate.

2.   Utilize Tax-Loss Harvesting (TLH)

Losing money on your investments is usually a bad thing, but utilizing a tax-loss harvesting strategy means you can claim capital losses to offset your capital gains. If you show a net capital loss, you can use the loss to reduce your ordinary income by up to $3,000 (or $1,500 if you are married and filing separately). Losses above the IRS limit can be carried over to future years. Sometimes it is advantageous to sell depreciated assets for this reason. A tax-loss harvesting strategy can help minimize your tax liability and keep more money in your pocket. However, trying to reduce taxes shouldn’t come at the expense of maintaining a thoughtful asset allocation in your portfolio.

3.   Asset Location

Some investments will be more tax-efficient than others. For example, a municipal bond is considered the most tax-efficient security because income from municipal bonds are federally tax-exempt and may be state tax-exempt. Investments like high-yield bonds are considered less tax-efficient because payments are not tax-exempt, meaning they are taxed as ordinary income. When looking at the table below, assets at the top are more tax-efficient than assets at the bottom.

Source: Fidelity

Like assets, there are investment accounts that are more tax-friendly. Tax-advantaged accounts allow you to defer paying taxes on the gains or earnings to a later date. For example, a traditional IRA or a 401(k) will allow you to contribute using pre-tax income and withdrawals are taxed when you retire, when your income is typically lower.

Pairing tax-advantaged accounts like a 401(k) with tax-inefficient assets like a high-yield bond and pairing taxable accounts (individual, joint, trust, etc.) with more tax-efficient assets will create a more optimal mix to minimize tax liability. Placing investments that have higher tax rates with accounts that delay taxes will help reduce the amount you owe. Since you are not expected to pay federal taxes on something like income from a municipal bond, there is no use placing it in a tax-advantaged account because there are no taxes to delay.

Of course, this is a bit of an oversimplification as there are many nuances that can make certain investment vehicles more tax-efficient than others. For example, although REITs are toward the bottom of the table, there are still plenty of advantages to investing in them. Dividends from REITs are sheltered from corporate tax, and some dividends are considered a return of capital that isn’t taxed at all. This is why it is imperative to work with an experienced professional who can use the nuances of each financial instrument to your advantage.

4.   Understand Cost Basis & Share Lots

When you buy any amount of stock, the stock is assigned a lot number regardless of the number of shares. If you have made multiple purchases of the same stock, each purchase is assigned to a different lot number with a different cost basis (determined by the price at the time of each purchase). Consequently, each lot will have appreciated or depreciated in different amounts. Some brokerage accounts use first in, first out (FIFO) by default. If you utilize FIFO, your oldest lots will be sold first. Sometimes FIFO makes sense, but not always. Sometimes it is ideal to sell lots with the highest cost basis, which is commonly done as part of a tax-loss harvesting strategy.

Passing on assets as an inheritance can also increase your cost basis. Assets passed on to the next generation at the time of death allow your heirs to pay tax only on capital gains that occur after they inherit your property, through a one-time “step up in basis.” For example, when one spouse dies, assets passed on to the surviving spouse will have a cost basis of the price of the asset on the day in which they passed. This eliminates the deceased spouse’s portion of capital gains.

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Reducing capital gains taxes is just one aspect of your overall financial health, and it may be reassuring to know that paying these taxes means your investment strategy is working. Even still, meeting your financial goals requires consideration of multiple factors, which is why collaborating with a financial advisor can make all the difference in how much you preserve and grow your wealth.

If you’re ready to receive a customized plan tailored to your needs and objectives, reach out to us at info@ComprehensiveAdvisor.com or call (760) 813-2125.

About Our Advisors

Brett Gottlieb is the founder of Comprehensive Advisor and a financial advisor with nearly two decades of industry experience. He graduated from California State University-Chico with two bachelor’s degrees, in business administration and economics, and is Life Insurance licensed in several states. He is passionate about guiding his clients on retirement income planning, helping each client pursue their specific retirement goals, and defending the assets his clients have worked so hard to achieve. Brett is a California native and currently resides in San Elijo Hills with his beautiful wife and three children.

Our team of qualified professionals have experience in the financial service industry, and our advisors hail from some of the largest independent broker/dealers and banking institutions in the country. They have dedicated their professional careers to creating personalized financial strategies for individuals and families who seek successful retirement planning and currently offer investment advisory services through AE Wealth Management, LLC. Our advisors take a common-sense approach to the planning process and work with clients to create a comprehensive retirement roadmap to help ensure their assets are preserved and they receive the income needed to enjoy their future. Based in Carlsbad, California, they work with clients throughout San Diego County and beyond. Learn more by connecting with Brett on LinkedIn or email them at info@ComprehensiveAdvisor.com.

Investment advisory products and services made available through AE Wealth Management, LLC (AEWM), a Registered Investment Advisor. Insurance products are offered through the insurance business C.A. Financial & Insurance Services. Comprehensive Advisor, LLC is an Investment Advisory practice that offers products and services through AE Wealth Management LLC (AEWM), a Registered Investment Advis or. AEWM does not offer insurance products. The insurance products offered by C.A. Financial &Insurance Services are not subject to investment Advis or requirements. CA Ins. Lic. #6000262. This material is intended to provide general information and is believed to be reliable, but accuracy and completeness cannot be guaranteed. Investing involves risk, including the potential loss of principal. Any references to protection benefits, safety, security, lifetime income, etc., generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the is suing insurance company. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. 2324951- 3/ 24