Capital Gains 101

With the slow but steady upward progress of the stock market over the last decade many investors have significant capital gains in their portfolios. We frequently discuss with our clients the best strategies to manage the taxes that these gains can produce. While each person’s situation is different, the following are some basic capital gain planning concepts that you may find helpful.

One of the good things about capital gains and losses is that you can generally control when they occur. Buying and holding good quality stocks is not only a sound investment strategy but also a good way to defer paying capital gains taxes. As long are your investments are performing properly and your asset allocation is reasonable, deferring taxes is a good thing. You definitely want to avoid short term capital gains whenever possible as there is a significant difference between the 15% tax on long term gains and the 25% to 37% tax on short term gains.

Offsetting gains and losses is another area where planning can pay off. Taking gains and losses in the same tax year can help reduce the taxes you will pay, especially if you have a stock at a loss that is a candidate for sale for other investment or cash flow needs. Reviewing your portfolio prior to year-end to look for gains and losses that could be harvested to your advantage is always a worthwhile practice.

There are times however when not offsetting a planned loss with a gain can make sense. You can deduct up to $3,000 in either short or long term losses against ordinary income if you have no corresponding gains to offset them against. Taking a small loss this year against ordinary income, taxable for most taxpayers at between 25% and 37%, is much better than using it to reduce a future gain that would only be taxable at 15% if it is long term.
A final strategy for those who have accrued large gains through the years is to establish an annual capital gains tax target. In managing your portfolio, setting a target amount of net capital gains allows you to gradually reduce what might otherwise become a significant tax burden and also allows you to more accurately calculate and pay any estimate taxes due without the risk of penalties.

Each person’s individual tax situation is unique and there is no one size fits all solution. Working with a Wealth Advisor that can partner with you to create comprehensive solutions that will help you meet your personal goals is always the best plan. Please feel free to contact myself or any of our team at First Merchants Private Wealth Advisors for assistance.

David Forbes

First Merchants Private Wealth Advisors products are not FDIC insured, are not deposits of First Merchants Bank, are not guaranteed by any federal government agency, and may lose value. Investments are not guaranteed by First Merchants Bank and are not insured by any government agency. This material has been prepared solely for informational purposes. First Merchants shall not be liable for any errors or delays in the data or information, or for any actions taken in reliance thereon. Any views or opinions in this message are solely those of the author and do not necessarily represent those of the organization.