If you missed our 2020 Tax Planning Tips: Part 1, click here. Otherwise, keep reading for some more great tips to help individual taxpayers minimize their 2020 tax bill! We’ll be highlighting a ton of great planning techniques over the next several weeks as we add more posts to this helpful series. Be on the lookout for part three, where we’ll dive into traditional IRAs and Roth accounts. 

Year-end Planning Moves for Individual Taxpayers

Tax Tip #2: Carefully Manage Investment Gains and Losses in Taxable Accounts 

If you hold investments in taxable brokerage firm accounts, consider the tax advantage of selling appreciated securities that have been held for over 12 months. The maximum federal income tax rate on long-term capital gains recognized in 2020 is only 15% for most taxpayers, although it can reach a maximum of 20% at higher income levels. The 3.8% Net Investment Income Tax (NIIT) can also apply at higher income levels.

To the extent you have capital losses that were recognized earlier this year or capital loss carryovers from previous years, selling winners this year will not result in any tax hit. In particular, sheltering net short-term capital gains with capital losses is a sweet deal—because net short-term gains would otherwise be taxed at higher ordinary income rates.

What if you have some loser investments that you would like to unload? Biting the bullet and taking the resulting capital losses this year would shelter capital gains—including high-taxed, short-term gains—from other sales this year.

If selling a bunch of losers would cause your capital losses to exceed your capital gains, the result would be a net capital loss for the year. No problem! That net capital loss can be used to shelter up to $3,000 of 2020 ordinary income from salaries, bonuses, self-employment income, interest income, royalties, and whatever else ($1,500 if you use married filing separate status). Any excess net capital loss from this year is carried forward to next year and beyond.

In fact, having a capital loss carryover into next year and beyond could work to your advantage. The carryover can be used to shelter both short-term and long-term gains recognized next year and beyond. This can give you extra investing flexibility in the coming years because you won’t have to hold appreciated securities for over a year to get a preferential tax rate. 

Since the top federal rates on net short-term capital gains recognized in 2021 could be higher than the 2020 top rates of 35% and 37% (plus the 3.8% NIIT, if applicable), having a capital loss carryover into next year to shelter short-term gains could be a very good thing.

Key Point: If you still have a capital loss carryover after 2020, it could come in handy if the country sees increased tax rates for 2021 and beyond.

Tax Tip #3: Take Advantage of 0% Tax Rate on Investment Income

A potential silver lining to a down year might be the ability to harvest some long-term capital gains at very favorable rates. For 2020 taxes, singles can take advantage of the 0% income tax rate on long-term capital gains and qualified dividends from securities held in taxable brokerage firm accounts if their taxable income is $40,000 or less. For heads of household and joint filers, that limit is increased to $53,600 and $80,000, respectively.

If securities are given to someone who is under 24 years old, the Kiddie Tax rules could potentially cause some of the resulting capital gains and dividends to be taxed at the higher rates that apply to the individual’s parent—which would defeat the purpose. Feel free to contact us if you have questions about the Kiddie Tax.

Looking for a Little More Guidance?

Tax planning can get overwhelming really quickly. At Dent Moses, we’re all about providing you with high-quality financial management services and an exceptional level of compassion. If you have any questions about our 2020 Tax Planning Tips series, or if you need general tax planning advice, you’ve come to the right place. Get in touch with us today.