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2020 Last-Minute Year-End Tax Strategies for Your Stock Portfolio

When you take advantage of the tax code’s offset game, your stock market portfolio can represent a little gold mine of opportunities to reduce your 2020 income taxes.

The tax code contains the basic rules for this game, and once you know the rules, you can apply the correct strategies.

Here’s the basic strategy:

  • Avoid the high taxes (up to 40.8 percent) on short-term capital gains and ordinary income.
  • Lower the taxes to zero—or if you can’t do that, then lower them to 23.8 percent or less by making the profits subject to long-term capital gains.

Think of this: you are paying taxes at a 71.4 percent higher rate when you pay at 40.8 percent rather than the tax-favored 23.8 percent.

And if you can avoid that higher rate with some easy adjustments in your stock portfolio, doesn’t it make sense to do that now?

Big Picture

Here are the five basic tax rules you need to know to find the tax savings you desire in your stock portfolio:

  • On your short-term capital gains and ordinary income, you pay federal taxes at rates of up to 40.8 percent. The 40.8 percent comes from the top income tax rate of 37 percent plus the 3.8 percent Affordable Care Act tax on net investment income.
  • You pay taxes on your long-term capital gains at rates from zero up to 23.8 percent (20 percent for capital gains plus 3.8 percent on investment income), depending on your income level.
  • You pay taxes on your stock dividends at rates from zero to 23.8 percent, depending on your income level.
  • If your personal capital losses exceed your personal capital gains, the tax code limits your capital loss deductions to $3,000 and allows you to carry over losses in excess of the $3,000 to future years until realized.
  • You first offset long-term gains and losses before you offset short-term gains and losses.
  • Donate appreciated stock to charity.
  • Do not donate stock that would produce a tax loss.

Now that you have the basics, here are seven possible tax planning strategies.

Strategy 1

Examine your portfolio for stocks that you want to unload, and make sales where you offset short-term gains subject to a high tax rate such as 40.8 percent with long-term losses (up to 23.8 percent).

In other words, make the high taxes disappear by offsetting them with low-taxed losses, and pocket the difference.

Strategy 2

Use long-term losses to create the $3,000 deduction allowed against ordinary income.

Again, you are trying to use the 23.8 percent loss to kill a 40.8 percent rate of tax (or a 0 percent loss to kill a 12 percent tax, if you are in the 12 percent or lower tax bracket).

Strategy 3

As an individual investor, avoid the wash-sale loss rule.

Under the wash-sale loss rule, if you sell a stock or other security and purchase substantially identical stock or securities within 30 days before or after the date of sale, you don’t recognize your loss on that sale. Instead, the code makes you add the loss amount to the basis of your new stock.

If you want to use the loss in 2020, then you’ll have to sell the stock and sit on your hands for more than 30 days before repurchasing that stock.

Strategy 4

If you have lots of capital losses or capital loss carryovers and the $3,000 allowance is looking extra tiny, sell additional stocks, rental properties, and other assets to create offsetting capital gains.

If you sell stocks to purge the capital losses, you can immediately repurchase the stock after you sell it—there’s no wash-sale “gain” rule.

Strategy 5

Do you give money to your parents to assist them with their retirement or living expenses? How about children (specifically, children not subject to the kiddie tax)?

If so, consider giving appreciated stock to your parents and your non-kiddie-tax children. Why? If the parents or children are in lower tax brackets than you are, you get a bigger bang for your buck by

  • gifting them stock,
  • having them sell the stock, and then
  • having them pay taxes on the stock sale at their lower tax rates.

Strategy 6

If you are going to make a donation to a charity, consider appreciated stock rather than cash, because a donation of appreciated stock gives you more tax benefit.

It works like this:

  • Benefit 1. You deduct the fair market value of the stock as a charitable donation.
  • Benefit 2. You don’t pay any of the taxes you would have had to pay if you sold the stock.

Example. You bought a publicly traded stock for $1,000, and it’s now worth $11,000. You give it to a 501(c)(3) charity, and the following happens:

  • You get a tax deduction for $11,000.
  • You pay no taxes on the $10,000 profit.

Two rules to know:

  1. Your deductions for donating appreciated stocks to 501(c)(3) organizations may not exceed 30 percent of your adjusted gross income.
  2. If your publicly traded stock donation exceeds the 30 percent, no problem. Tax law allows you to carry forward the excess until used, for up to five years.

Strategy 7

If you could sell a publicly traded stock at a loss, do not give that loss-deduction stock to a 501(c)(3) charity. Why? If you sell the stock, you have a tax loss that you can deduct. If you give the stock to a charity, you get no deduction for the loss—in other words, you can just kiss that tax-reducing loss goodbye.

Your stock portfolio provides you with the seven great tax-planning opportunities we showed you in this article. For example, if you give money to charity, your parents, and/or your non-kiddie-tax children, you keep more tax money in your pocket (or the family’s pockets) by using appreciated stocks rather than cash.

Takeaways

You absolutely must plan for your opportunities inside the portfolio to offset your gains and losses. With planning, you win free money with the offsets, and you’ll find the offset game fun and easy to play.

The bottom line is that the seven strategies in this article give you straightforward ways to keep more of your money and send less to the IRS.

The end of the year is right around the corner. Because it takes time for stock transactions to settle and you don’t want to worry about settlement dates, get your portfolio tax-deduction optimized well before the end of the year—say, no later than December 20, 2020.

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2020 Last-Minute Year-End Retirement Deductions

The clock continues to tick. Your retirement is one year closer.

You have time before December 31 to take steps that will help you fund the retirement you desire. Here are four things to consider:

1. Establish Your 2020 Retirement Plan

First, a question: As you read this, do you have your (or your corporation’s) retirement plan in place? 

If not, and if you have some cash you can put into a retirement plan, get busy and put that retirement plan in place so you can obtain a tax deduction for 2020.

For most defined contribution plans, such as 401(k) plans, you (the owner-employee) are both an employee and the employer, whether you operate as a corporation or as a proprietorship. And that’s good because you can make both the employer and the employee contributions, allowing you to put a good chunk of money away.

2. Claim the New, Improved Retirement Plan Start-Up Tax Credit of Up to $15,000

By establishing a new qualified retirement plan (such as a profit-sharing plan, 401(k) plan, or defined benefit pension plan), a SIMPLE IRA plan, or a SEP, you can qualify for a non-refundable tax credit that’s the greater of

  • $500 or
  • the lesser of (a) $250 multiplied by the number of your non-highly compensated employees who are eligible to participate in the plan, or (b) $5,000.

The credit is based on your “qualified start-up costs,” which means any ordinary and necessary expenses of an eligible employer that are paid or incurred in connection with

  • the establishment or administration of an eligible employer plan, or
  • the retirement-related education of employees with respect to such plan.

3. Claim the New Automatic Enrollment $500 Tax Credit for Each of Three Years ($1,500 Total)

The SECURE Act added a nonrefundable credit of $500 per year for up to three years beginning with the first taxable year beginning in 2020 or later in which you, as an eligible small employer, include an automatic contribution arrangement in a 401(k) or SIMPLE plan.

The new $500 auto contribution tax credit is in addition to the start-up credit and can apply to both newly created and existing retirement plans. Further, you don’t have to spend any money to trigger the credit. You simply need to add the auto-enrollment feature.

4. Convert to a Roth IRA

Consider converting your 401(k) or traditional IRA to a Roth IRA.

If you make good money on your IRA investments and you won’t need your IRA money during the next five years, the Roth IRA over its lifetime can produce financial results far superior to the traditional retirement plan.

Takeaways
Having a retirement plan is a good money strategy for most business owners because it creates savings that you are unlikely to tap and that enable compound tax-free (Roth) or tax-deferred growth.

So step one is to get your plan in place before December 31 so you, the business owner, can make both employer and employee contributions. This is true even when you operate as a one-person corporation or proprietorship.

If you have employees, make sure to take advantage of the tax credits for (a) start-up of the plan and (b) establishing automatic contributions (opt-outs are available, of course).
Seriously consider converting your existing accumulations to a Roth IRA. The long-term savings here can be huge.
Make sure to leave the converted funds in the Roth for at least five years.

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