Effective Planning To Minimize Capital Gains Tax
By Brian Famigletti, Managing Director & Head of Marketing
Understanding Capital Gains
As another record-setting year for the stock market comes to a close, many high-net-worth investors may find themselves looking for ways to minimize capital gains tax.
After a year of strong performance, realizing capital gains can lead to significant tax exposure, if not managed properly. Long-term gains on assets held more than one year are typically taxed at preferential rates, but can reach up to 20% for top earners — and that’s before the 3.8% net investment income tax.
A proactive approach can help investors protect more of their after-tax returns. This approach begins with a clear understanding of each investment’s cost basis, holding period, and tax classification. Investors should also work closely with financial and tax professionals to anticipate gains before year-end, allowing time to strategize and execute offsetting trades to reduce the overall tax exposure.
Strategies to Offset Gains
One of the most effective ways to limit tax exposure is tax-loss harvesting.
This strategy works by selling underperforming assets, or assets that can be sold at a loss, to offset taxable gains realized elsewhere. Even in strong markets, there are often opportunities to harvest small losses from individual holdings or specific sectors that have lagged the broader market.
It’s important to note, however, that timing is crucial. Losses must be realized before December 31st. Additionally, if you expect your income (and therefore tax bracket) to be lower, it may make sense to delay sales of appreciated assets until the following year.
It’s also key to choose your asset locations wisely; in other words, placing investments in the most tax-efficient accounts possible, based on their characteristics. For instance, high-income-generating assets may be better suited for IRAs, where income is tax-deferred, or tax-free in the case of a Roth IRA. On the flip side, holdings that are expected to see long-term growth may be better placed in taxable accounts.
Looking Beyond Year-End
Minimizing taxes shouldn’t just be an end-of-year exercise. It is best viewed as a continuous process, integrated into a long-term financial plan.
High-net-worth investors tend to benefit most from a holistic, tax-aware plan that combines portfolio design, estate planning, and charitable contributions into a single tax-efficient plan. Charitable giving can offer the dual benefit of donating appreciated securities directly to charities, while providing a full deduction for the current value of the gift. Reviewing holdings at least quarterly can also help effectively manage gains and losses.
If you’re looking to optimize your investment and tax strategy this capital gains season, our advisory team can help. Contact Griffin Asset Management to learn more about how a tax-smart approach can help you meet your long-term goals.
Sources:
JPMorgan: How can investors minimize tax burdens during capital gains season?
