Economy Still Humming As The Fed Begins To Address Inflation

A middling jobs report showed lower unemployment, but inflation concerns continue. How quickly will the Fed complete its taper? Annex Wealth Management’s Dave Spano and Derek Felske discuss.

Capital Gain/Loss Planning: Capital Gains Distributions; Tax Loss Harvesting 

In this week’s MoneyDo, we encourage you to take part in a key component of year-end wealth management – evaluating gains and losses.  

After the continued growth the market has experienced this year, you may discover that your holdings are in a different position than they were just a year ago. Despite the potential complexities, evaluating gains and losses should be part of your end-of-year MoneyDos.  

The gain and loss evaluation process has two critical components: 

• Considering tax implications as you get ready to file taxes 

• Reviewing the risk you are taking in your portfolio and considering adjustments, if needed 

When considering taxes, keep in mind that long-term capital gains are taxed differently than other types of income. Depending on your situation, long-term capital gains may be taxed at 0%, 15%, or 20%.  

For lower-income taxpayers, it’s possible to have some or all of these gains fall into the 0% capital gains tax rate. For higher income taxpayers, your gains may be taxed at the 15% or 20% rates. Additionally, higher income taxpayers may be faced with a 3.8% surtax on investment income. 

The end of the year is a great time to review what assets you hold and look at rebalancing your portfolio. When you do, consider your mix of assets and determine if they’re in line with your risk tolerance. It’s important to note that if you are on Medicare, you should be aware of increasing your income too much. There are certain income thresholds that can cause higher monthly Medicare premiums for you in a future year.  

It’s also important to look at the holding period of assets you’re selling. If you’re realizing gains on holdings you’ve owned for 365 days or less, the sale would be considered short-term. Short-term capital gains rates are generally less favorable, as they mirror that of your current ordinary income rates. 

For many newer investors, it takes some time to understand why or how a realized loss could be a tool in your financial toolbox. However, a tax loss can sometimes be used to reduce your tax liability. If your portfolio has realized gains, that could potentially bring you into a higher tax bracket. Realizing a loss can potentially reduce your tax bill.  

Things to consider before realizing losses: 

• Your losses can offset other capital gains, to the extent you have them. Beyond that, up to $3,000 of losses can be used to offset ordinary income. Any remaining losses beyond that will generally get carried forward into future years. 

• Ask yourself this: Do you already have suspended losses which you are carrying forward on your tax return? If so, you may not receive additional tax savings by realizing more losses now. 
• Selling a security with a loss and then immediately buying it back may create an unintended consequence. You would need to wait 31 days before buying the security back. If you do not, the “wash sale” rule kicks in, preventing you from realizing and benefiting the tax loss created by the initial sale. 
• Make sure to consider if you’d leave the funds in cash after realizing a loss, or if you’d be reinvesting the proceeds into a different type of security. 

If you’re worried about the tax implications of realizing gains and/or losses, be sure to review your projected 2021 income before executing any sales. Don’t hesitate to get in touch with us here at Annex Wealth Management. We stand ready to help in any way we can. 

“My favorite part of the Axiom is the DYADT (Does Your Advisor Do This?) where we highlight topics and concepts that we bring to our clients that other firms either can’t or won’t deliver. For me, these articles amplify what “Know The Difference” is all about.“

– Guest Editor: Steve Dryer | Managing Director of Operations
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