Year-end tax strategies for stock owners

Stock strategies that can drastically reduce your taxes from stock sales. Why pay taxes on stock sales at a 40.8 percent rate when you could lower the rate to 23.8 percent?

You may be able to have substantial tax savings by making a few easy adjustments.

Knowing these basic tax rules could provide you with major tax savings:

  1. On short-term capital gains, you can pay taxes at a rate of up to 40.8 percent. This is due to the combination of the top income tax rate of 37 percent and paying the 3.8 percent net investment income.
  2. The maximum tax rate on long-term capital gains is 23.8 percent. This is the result of the highest long-term capital gain rate being 20 percent plus and paying the 3.8 percent net investment income.
  3. The tax rate you pay on stock dividends ranges from zero to 23.8 percent, depending on your income level.
  4. If your personal capital losses exceed your personal gains, the tax laws limit your capital loss to $3,000 but allow you to carry forward the losses in excess of $3,000 to future years.
  5. You offset long-term gains and losses before offsetting short-term gains and losses.
  6. It’s advantageous to donate appreciated stock to charity.
  7. Making a donation of stock that would provide a deductible tax loss would wipe out the tax-deductible loss.

Knowing these tax strategies could significantly lower your taxes:

  1. Try to offset short-term gains at a possible high rate of 40.8 percent with long-term losses with rates up to 23.8 percent. This eliminates the high taxes by offsetting them with low-taxed losses.
  2. Take advantage of long-term losses to create the $3,000 deduction against ordinary income. Use a 23.8 percent loss to eliminate a 40.8 percent gain.
  3. If you are trying to take advantage of a loss by selling stock, avoid the wash-sale loss rule. If you sell stock and buy substantially identical stock within 30 days, you won’t get to recognize your loss on that sale.
  4. If you have lots of capital losses or capital loss carryovers, consider selling stock that would create offsetting capital gains. You don’t want to die with large unused loss carryovers.
  5. If you give money to your parents to help with living expenses or to your children, give them appreciated stock instead if they will be in a lower tax rate than you. If they are in a low tax bracket, they might not pay any taxes on the capital gains at all.
  6. If you donate stock to charity, give appreciated stock since you will be able to deduct its fair market value.
  7. Don’t donate stock that would provide you with a loss. Sell the stock first to create a loss and then give the proceeds to charity. As an example, suppose you bought stock for $12,000, and it’s now worth $2,000. If you donate it, you will get a $2,000 tax deduction. But if you sell the stock first and give the $2,000 proceeds you will also be able to claim a $10,000 stock loss.

David Zubler is a tax accountant and Enrolled Agent in East Tennessee, providing tax strategies and representing clients before the IRS and has over 25 years of tax experience. He is the author of four tax books, is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can be reached at (865) 363-3019 or contacted by email at david@yourtaxcare.com.