As we near year-end, we thought it would be timely to review the capital gain and loss rules. Any planning must be done before December 31st to be effective for your 2016 income tax returns.
Let's start with a primer. Long-term capital gains apply to assets held MORE than one year. You don't count days, you count months. So, for example, if you bought a security on January 1, 2016, it will become long-term on January 2, 2017. The tax rate on a long-term gain is generally lower than the rate on a short-term gain. Check with your tax advisor to determine the rates that apply to your gains.
Short-term gains apply to assets that you hold for one year or LESS. They are generally taxed at ordinary income rates. Hence, the rate on a short-term gain is generally higher than on a long-term gain.
Don't forget state income taxes. Most states have an income tax system, and capital gains taxes are generally included. Once again, check with your tax advisor to determine if, and at what rates, your capital gains are taxed for state purposes.
Now for the planning. If you have capital gains this year, any losses you have may be used to offset some or all of the gains. Long-term losses are first used to offset long-term gains, and short-term losses are first used to offset short-term gains. Once you have netted long and short-term gains/losses, you can then use any remaining loss to offset any gain not already matched, regardless of the nature of the gain. And, if you have losses that exceed your gains, you can deduct up to $3,000 per year in losses against ordinary income. Any unused losses carryover without limit, until your death. If you own a jointly titled asset , the losses will carryover until the death of the second joint owner.
Stocks and bonds are considered capital assets, but you might own other assets that are eligible for capital gain and loss treatment. For example, investments in real estate would generally be subject to capital gains and loss treatment (but with some tricky rules depending on how you depreciated the property, if you rented it). Your tax advisor can help you identify the assets you hold that are eligible for capital gain and loss treatment.
Determining whether to place trades for the purpose of generating losses to offset gains is not a simple matter. Other factors to consider are whether you may be subject to alternative minimum tax, whether the 3.8% extra tax on gains applies to you (depending on your income level), and whether your tax rate will change from this year to next, just to mention a few. It's best to consult with your tax advisor before selling securities to capture gains or losses.
For informational purposes only. Consult with your tax professional regarding your specific situation.