Cypress Wealth Services
April 2022
It seems the value of just about everything is on the rise lately. In the midst of a fluctuating market, some might forget about the taxes we might pay with the rise of our portfolio or home value. Don’t neglect to keep this reality in mind! As the old saying goes, “The only two certainties in life are death and taxes.” Taxes are the price we pay for civilization, but thankfully, you aren’t completely powerless when it comes to capital gains tax—you can employ certain strategies to help mitigate and manage your tax obligations.
The amount of capital gains taxes you pay is dependent on the amount of time you hold your assets. Having an investment for a year or less will trigger short-term capital gains taxes, which are taxed as ordinary income as high as 37% in some cases.(*1) Long-term capital gains taxes are based on your income and are taxed at 0%, 15%, and 20%.(*2) While the simplest way to pay lower capital gains taxes is to hold your assets for more than a year, there are other strategies to prevent taxes from eating away at your wealth.
Saving for retirement is one way to avoid taxes on capital gains. With tax-deferred accounts (think IRAs and 401(k)s), you’ll only pay ordinary income tax when you withdraw the money, and you won’t face capital gains taxes on the growth. The same goes for Roth IRAs. Not only will you benefit from avoiding income taxes on the withdrawal if you are 59½ and have held the Roth for more than five years, but you’ll also avoid capital gains taxes.
Not all your stock picks are going to provide growth, and there may be times when you have to make some tough decisions about your portfolio. Tax-loss harvesting is a strategy that allows you to offset your capital gains with capital losses. If you own a losing bond, mutual fund, or stock in accounts other than your 401(k) or IRA, review your realized and unrealized gains and losses. You might be able to offset some of your gains by selling some losses, thus lowering your taxable income. And if you live in a high-tax state, you may want to defer tax by deducting up to $3,000 of capital losses in excess of capital gains and carrying any leftover capital losses forward into future years.(*3)
Cost basis is another piece of the capital gains tax puzzle to keep in mind. Cost basis is the amount you paid for your asset. There are many ways to decide what cost basis to use if you have multiple asset purchases in different periods. Most investors use the first-in, first-out method (FIFO), but there are other methods, such as last-in, first-out (LIFO), and average cost. Be sure to consult your financial advisor before taking advantage of this option.
If the asset in question is real estate, you may be in luck. Currently, homeowners can sell and exclude up to $250,000 (for single tax filers) or $500,000 (for those who are married filing jointly) of the gains if you owned the property and lived in the house for at least two of the five years prior to selling it.(*4) Even better, you can claim this exclusion on another property in the future as long as it’s been more than two years since you previously claimed it.
Business profits are also excluded from capital gains tax and instead are subject to business tax rates. In general, capital gains taxes apply to the sale of personal assets. Your business income is reported differently on your tax return and won’t face capital gains taxes.
Although there are many alternative strategies for those who want to offset or defer capital gains taxes or need to structure their income in a way that minimizes taxes, as with anything related to taxes, this can get complicated quickly. Luckily, you don’t have to figure it out alone. We at Cypress Wealth Services are here to help you navigate all your options when it comes to mitigating capital gains taxes—taking into consideration your unique circumstances regarding your sales, cost basis, and length of time of ownership.
Our goal is to bring clarity and confidence to your financial life. We can help you examine your options and work to set up your investments to operate at their full potential so you won’t face unnecessary tax penalties down the road. Schedule your complimentary introductory meeting by calling our office at 866.888.6563 or contacting one of our offices today.
Cypress Wealth Services is an independent RIA firm providing financial planning and investment management to high net worth individuals, families, business owners, and institutions. Cypress Wealth Services comprises professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services is uniquely qualified to serve a broad range of client needs, and their experience and expertise act as a foundation for their client service process. The firm uses The Second Growth, which focuses on efficiently protecting, growing, and transferring the wealth and legacy a person has already built to their loved ones. With financial advisors in Palm Desert, CA, Tustin, CA, Athens, GA, and Anchorage, AK, the firm serves clients across the country in Wealth Management Services, Fiduciary Services, 401(k) Design and Management, Investment Reporting Services, Financial and Retirement Planning, and more. For more information, visit www.CypressWS.com or call 760.834.7250.
