2021 was a banner year for investors. The S&P 500 index was up 26% and several sectors were up even more. But with that strong performance came capital gains taxes. Even if you were a buy-and-hold investor, many mutual funds made large capital gains distributions at the end of 2021. And many investors were unprepared for the associated taxes.
After the end of 2021 we fielded many calls from clients and others who were surprised by a large tax bill. Many had to raid their Emergency Funds or even sell more securities in order to pay last year’s tax. It was painful for everyone.
2022 appears to be shaping up very differently. So far this year the S&P 500 index is down about 25% as of 10/17/22. As such, many investors are looking at losses instead of gains.
You may know that if you buy one share of stock at $10 per share, and then sell at $12, you earn $2 or a 20% return. The gain is taxed depending on how long you held the shares. For shares held for less than one year, gains are taxed at ordinary income tax rates which, for most people, tends to be a higher tax rate than the capital gains tax rate. For shares held longer than one year, gains are taxed at the long-term capital gains rate which varies based on your income.
Why is 2022 going to be so different than 2021?
With stocks and bonds down so far this year, many taxpayers may actually be able to get tax deductions if they sell securities at a loss before December 31st. This is a total turnaround for taxpayers that had to make extra tax payments for the big gains of 2021.
The unpredictable variable: Mutual fund distributions
While you may not have sold any securities in 2021, you still might have faced significant capital gains taxes last year. This is because funds are required to pass through to investors at least 90% of the gains they earn. This is one of the reasons that so many investors were caught off guard in 2021—the mutual funds they held made big, taxable capital gains distributions.
So far in 2022, it looks like some funds will be distributing taxable capital gains, but not as much as in 2021.
How can I avoid a big tax surprise?
We can help you estimate the potential gains that may be coming your way from funds that you own and trades you have completed so far this year. The key is having the complete picture. In other words, knowing what you own in non-retirement accounts across all accounts. That’s because gains in one account can exceed losses in another. If you aren’t looking at the entire picture, you can be in for a surprise tax bill.
We have other strategies, too, that we use to help better manage your taxable capital gains both now and in the future. So, if you have questions about your capital gains for 2022, give me a call and we can discuss if what you might be able to do. You can also schedule a quick call with me by clicking HERE.
Lyman H. Jackson
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1 An additional 3.8% net investment income (NII) tax applies to taxpayers on the lesser of NII or modified gross income in excess of $200,000 (single filers) or $250,000 (married filing jointly or qualifying widow(er)s).
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client after entering into an advisory relationship. Information herein includes opinions and forward-looking statements that may not come to pass. Information is derived from sources believed to be reliable. Information is at a point in time and subject to change without notice. Such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.