6 Stock Tax Planning Tips to Optimize Your Returns

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Investing is a smart decision to prepare for your future, but your tax liabilities can deplete your earnings if you aren’t careful.

However, you can use some simple tax strategies to offset your tax liabilities and keep more money in your pocket. In addition, understanding the tax rules will help you make the best investment decisions.

The goal is to avoid short-term capital gains and ordinary income taxes that can cost as much as 40.8% and lower your taxes as much as possible using long-term capital gains.

Here are some sample strategies to get you started.

Offset Short-Term Capital Gains with Long-Term Losses

If you have stocks you’ve owned for a short and long time, balance when you sell both to avoid the high short-term capital gains. For example, if you’re holding stocks that are losing but you’ve had them for more than one year, sell them at the same time as selling stocks that took off and earned you capital gains in less than a year.

This way, you offset the short-term capital gains taxes with the long-term losses.

Let Long-Term Losses Offset your Ordinary Income

You’re allowed up to a $3,000 deduction against your ordinary income. So if you have losses within the 23.8% tax bracket, you can lower your ordinary income by $3,000, which reduces your tax burden.

Offset Capital Gains and Adjust Basis with the Wash-Sale RuleWash-Sale Loss Rule

Under this rule, you can sell stock at a loss and purchase identical stock within 30 days of that date. You don’t write off the loss but instead use the loss to lower the basis of the new stock. This lowers your capital gains (if you have any) when you sell the new stock.

Use up Excessive Capital Losses

If you have more losses than the $3,000 allowance, sell more securities with capital gains. The losses can offset the gains; you’ll pay fewer taxes and won’t risk losing any funds beyond the $3,000 allowance.

Gift Appreciating Stocks

If you want to give monetary gifts, consider gifting appreciated stock. Then, when your loved ones sell the stock, they’ll pay the taxes at their tax bracket versus your higher tax bracket. As a result, they’ll receive more money, and you’ll avoid high tax liability.

Donate Stocks to Charity

If you give to charity, consider gifting appreciated stocks. You deduct the stock’s fair market value as a donation and don’t owe taxes on the capital gains. Make sure, however, that your donation doesn’t exceed 30% of your AGI.

Don’t Donate Stocks with a Loss to Charity

You shouldn’t donate stocks with a capital loss. Instead, keep the stock for yourself, sell it, and write off the loss on your taxes.

Contact me today if you have any questions about investments and tax planning.