Post-election tax planning
The election is finally over and now it is time to wrap up the year. With the new Administration being installed in January 2021, what should you be doing now to be prepared? Will tax rates go up? What’s going to change? What things should you do to be ready?
Nothing has changed for 2020, but the Biden Administration has plans to raise taxes. They may or may not be able to make those changes depending on Congress. We’ll have to see. For now, there’s a few things to check-in on before December 31st.
Capital Gains/Losses
With the Dow Jones Industrial Average hitting a new record high this week, there aren’t a lot of stocks with losses but you may have a few if you own investments with holdings in certain restaurant, travel or hospitality companies.
With gains and losses there are two types: short-term (held for one year or less) and long term (held for more than one year). In calculating your gains and losses, you need to first net your short-term gains and losses against each other and the same for long term gains and losses.
Type of gain/income | Taxed at (2020) | Implication |
Short term capital gains, dividends & interest | Ordinary income tax rates -0%-37% | Often your highest tax rate |
Long term capital gains | 0% (<$78,750) 15% ($78,750-488,850 MFJ) 20% (>$488,850 MFJ)
| Often your lower tax rate (or, possibly no tax) |
Because the IRS lets you offset your gains against losses, the end of the year can be a good time to consider selling losers to lock in losses. If you don’t have any capital gains, you can still deduct up to $3,000 of losses per year. If you have more losses, you can carry them forward to future tax years until they are used up.
To ensure that you “book” or get your losses for the year, you must sell the stock and not repurchase it within 30 days before or after the sale. By selling, you are recording the loss, which up to that point was an unrealized or “loss on paper only”. This should show up on your 1099 in mid-February.
Coordinating tax losses with gains
By planning tax loss sales and sales of appreciated securities, you can attempt to zero-out the gains and losses so that there are no, or very little capital gains impact. By doing this on a regular basis, you are reducing the “paper gains” that could be building up on certain securities. Because you will very likely need to sell the securities at some point, effectively you are reducing your future tax liability. This can be helpful in the future, especially if you have to sell to raise cash for some reason.
Of course, under current tax law if you die, your estate will receive a “step-up in basis” which means that your original cost basis will be increased to the current market value of the securities at the time of death. As such, if the securities are sold then, there is usually little to no taxable gain. If that happens, who cares? There is no capital gain because of the step-up and you aren’t around anyway!
Caveats
We’ve covered a number of general pointers here. If you decide to start implementing a tax loss harvesting plan, be sure to consult a good tax adviser. There are a number of special rules that can apply and you want to be sure that you do it right with no surprises.
Have more questions about year-end planning? Give your tax advisor or us a call. We’re here to help.
Lyman H. Jackson
617-653-3303
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.