Investing can create welcome financial opportunities, along with a few tax considerations. Here are several strategies that could help you keep more of your investment gains.
Choose the right shares when selling stock
Situation: If you've purchased shares of the same stock at different times, you probably paid different prices for them. When it's time to sell, the shares you choose can make a big difference in how much of a taxable gain or loss you report.
Tax Tip: Consider identifying the specific shares you want to sell with your broker. Choosing shares that you purchased at a higher price can reduce your taxable gain, while saving lower-priced shares for other tax-planning opportunities, such as donating them to charity.
NOTE: Don't automatically assume the cost basis reported by your brokerage is complete, particularly for older investments. If basis isn't reported on Form 1099-B, you may need to determine and report it using your own records.
Make the most of a successful investment
Situation: A stock that has performed extremely well over the years may be worth considerably more than what you originally paid for it. If you decide to sell some shares to raise cash or move the money into other investments, the sale could create a large taxable gain.
Tax Tip: Consider selling shares over several years instead of all at once. You may also be able to offset some of your gains with investment losses or reduce your taxable gains by donating appreciated investments to charity.
Plan large gains with the NIIT in mind
Situation: Selling an investment for a large profit could come with an extra tax bill. Higher-income taxpayers may have to pay the 3.8% Net Investment Income Tax (NIIT) on top of regular capital gains taxes. A large investment sale could even push your income high enough for at least some of the gain to be subject to this additional tax.
Tax Tip: Estimate your income for the year before selling an investment for a large profit. If you have some flexibility, spreading sales over multiple years or selling during a lower-income year could reduce the amount subject to the NIIT.
Include state taxes in your investment decisions
Situation: Federal capital gains taxes aren't the only taxes to consider when selling an investment for a profit. Depending on where you live, you may also owe state income taxes on the gain. How much you owe can vary significantly from one state to another.
Tax Tip: Estimate both your federal and state tax bills before making a large sale. This can be especially important if you're planning to move to another state or expecting an unusually large investment gain.
Choose tax-efficient assets when transferring wealth
Situation: What you give to your heirs can make a big difference in the taxes they eventually pay. For example, $500,000 of stock that you originally purchased for $100,000 comes with a potential taxable gain of $400,000, while $500,000 of cash does not.
Tax Tip: Consider cost basis when deciding which assets to give to family members during your lifetime and which assets to retain as part of your estate. In general, holding highly appreciated assets until death can result in a better tax outcome because inherited property generally receives a basis adjustment to its value at death, while property given during your lifetime generally keeps your original cost basis. Your particular tax situation, however, could make lifetime gifts more advantageous.
Please call if you have questions about making your investment strategy more tax-efficient.