Selling inevitably leads to taxes, but investors can minimize the amount of money they pay to the government with some careful planning. Below are five things you need to know in order to trim your investment taxes:
1. Capital-gain rates are up for the wealthy.
Tax rates on profits from assets held onto for more than one year increased from 15 percent in 2012 to 20 percent in 2013 for people with a gross income of $400,000 or more ($450,000 or more for married couples). In addition, single investors with AGI of $200,000-400,000 and married couples with AGI of $250,000-450,000 are subject to higher taxes at a rate of 15 percent. On top of this, taxpayers in the highest tax brackets will be subject to an additional 3.8% Medicare surcharge tacked on top. If you fall into one of these categories, taking gains in years where you make less income or have more deductions could save you a lot of money.
2. Short-term sales will hurt you.
Gains from the sale of short term investments (those held for one year or less) are taxed as ordinary income, which can be as high as 39.6 percent. If you are in the top tax brackets, you will also be subject to a 3.8 percent Medicare surcharge. Try to hang onto your securities for more than one year unless you have capital losses to offset costly short-term gains.
3. Get a break on company stock in a 401(k).
The money that comes out of retirement plans is usually taxed. However, there is an exception for employer stock. If your company allows it, take a lump-sum distribution of your employer shares because you are only taxed at your “basis” for what you paid. However, if you put the shares into an IRA, you end up paying taxes on the appreciation at ordinary tax rates when you take the money out.
4. Your trustees will get a break on taxable accounts.
When you die, the assets in taxable accounts increase to the current market value, known as stepping up the basis. When your heirs sell, they won’t owe the appreciation that occurred during your lifetime. However, the money in tax-deferred accounts such as IRAs and 401(k) plans are not stepped up. Use taxable accounts to sell stock and leave securities with big gains alone. Take the rest from tax-deferred accounts with mandatory distribution requirements.
5. Send your stock to charities.
A lot of charities will take your appreciated stock instead of a cash donation. If you have owned it for more than a year, you will get a deduction for the current value of the stock. Charities can sell the stock and won’t be subject to capital-gain taxes because it is a tax-exempt organization. Find stocks in your taxable accounts with the greatest appreciation and use them to fund a charity.