As financial advisors, we understand that tax season can be a time of stress and complexity for many. But beyond the maze of paperwork and looming deadlines, we see this time of year as a golden opportunity for reflection and strategic planning.
In our line of work, the period leading up to April 15th isn’t just about filing taxes; it’s about diving deep into the financial lives of our clients to unearth opportunities and strategies that can lead to significant savings and smarter financial decisions. Since tax-smart investment management plays a crucial role in helping our clients meet their financial goals, this review and analysis period usually involves identifying strategies to minimize capital gains taxes, which can significantly reduce investment returns over time.
Of course, each client’s financial situation is unique, requiring a tailored approach to tax planning. However, there are key strategies we consistently employ to help our clients manage capital gains taxes and enhance their investment outcomes over time.
Understanding Capital Gains Taxes
When an investor sells an asset outside of a tax-deferred account like a 401(k) or IRA, the difference between the sale price and the original purchase price (the “basis”) is subject to capital gains taxes if it results in a profit. This tax applies to a wide range of assets, including securities like stocks and bonds and tangible assets like real estate and personal property.
The capital gains tax rate is based on how long an investor held an asset before selling it:
- The short-term capital gains rate applies to assets held for one year or less and is the same as the investor’s ordinary income tax rate.
- The long-term capital gains rate applies to assets held for more than a year and is either 0%, 15%, or 20% depending on the investor’s taxable income and filing status.
Most taxpayers pay the long-term capital gains tax rate of 15%. However, the highest earners—single and joint filers with incomes above $518,900 and $583,750, respectively, in 2024—pay a long-term capital gains rate of 20%. Meanwhile, single and joint filers earning less than $47,025 and $94,050, respectively, pay a 0% tax rate on long-term capital gains in 2024.
5 Strategies We Leverage to Help Clients Minimize Capital Gains Taxes
Navigating the complexities of capital gains taxes involves both a clear understanding of the current tax landscape and careful planning. Here are five strategies we often leverage to help our clients minimize capital gains taxes.
#1: Intentional Buying and Selling of Assets
To minimize capital gains taxes, we pay careful attention to two critical pieces of information for any assets our clients intend to sell: the cost basis and the holding periods.
- Cost Basis. This is essentially the original value of an asset for tax purposes, usually the purchase price. Understanding the cost basis allows us to calculate the precise gain or loss upon sale, which in turn determines the client’s potential tax liability.
- Holding Period. The client’s holding period—whether they held an asset for more or less than a year—also plays a pivotal role in our strategy as it affects the tax rate that applies to any capital gains.
Armed with this information, we can strategically plan trades to optimize after-tax returns for our clients.
For instance, we might advise holding an asset a little longer to qualify for the lower long-term capital gains tax rate. Alternatively, we may recommend selling an asset in a year when the client expects a lower taxable income to benefit from a reduced tax rate.
This strategic approach is part of our comprehensive service, ensuring that our clients’ investment decisions are both financially sound and tax efficient.
#2: Account Diversification
Diversifying investments across different account types is a sophisticated strategy we employ to help our clients proactively manage and potentially minimize their capital gains taxes over time. This method takes advantage of the distinct tax treatments applied to various account types, optimizing both current and future tax liabilities for our clients.
Investment accounts generally fall into three categories: tax-free accounts, tax-deferred accounts, and taxable accounts. Each has its own set of tax rules and advantages depending on a client’s unique situation and goals.
- Tax-free accounts, such as Roth IRAs and Roth 401(k)s, provide an opportunity for investments to grow tax-free. Clients can also withdraw their funds tax-free in retirement, provided they meet certain conditions.
- Tax-deferred accounts, including traditional IRAs and 401(k)s, allow investments to grow tax-free until withdrawals begin, typically in retirement. This can significantly defer a client’s tax liabilities until retirement, when a client might be in a lower tax bracket than they are now.
- Taxable accounts, such as individual or joint brokerage accounts, are subject to capital gains taxes on the profits from sales of investments within these accounts. However, they offer clients flexibility with no limits on contributions and the freedom to withdraw at any time without penalties.
By allocating investments across these different account types, we can tailor an account diversification strategy that aligns with our clients’ financial objectives while minimizing capital gains taxes.
#3: Tax-Loss Harvesting
Tax-loss harvesting involves selling investments at a loss to offset capital gains. This strategy plays a critical role in our approach to helping clients minimize capital gains taxes.
By carefully managing losses, we can help our clients lower their overall tax liability in a given tax year. First, it allows clients to offset taxable gains with losses, dollar for dollar. Moreover, if the client’s losses exceed their gains, they can use up to $3,000 of the excess loss to reduce their ordinary taxable income, carrying over any unused losses to future years.
In managing this process for our clients, we can also ensure that they remain compliant with the various rules surrounding tax-loss harvesting, especially the “wash sale rule.”
The IRS prohibits claiming a tax deduction for a loss if an investor repurchases the same security, or one substantially identical, within 30 days before or after the sale. Violating this rule—whether intentional or unintentional—can undo many of the tax benefits associated with tax-loss harvesting.
#4: Managing Taxable Income
Strategically managing taxable income is another crucial method we use to help our clients minimize capital gains taxes. This approach involves advising clients on the optimal timing for realizing income, making charitable donations, contributing to retirement accounts, and leveraging other tax deductions and credits.
Through a combination of these strategies, we provide our clients with a comprehensive plan to manage their taxable income effectively. This proactive approach not only helps minimize their current capital gains taxes but also paves the way for a healthier financial future, ensuring that they keep more of their hard-earned money.
#5: Gifting or Donating Appreciated Assets
For clients interested in financially supporting their loved ones or championing a cause dear to them, we frequently advise on the strategic gifting or donating of appreciated assets. This approach serves a dual purpose: it not only helps minimize capital gains taxes but can also significantly further their philanthropic and estate planning objectives.
Gifting appreciated assets to family members or other beneficiaries is a tax-free method for transferring wealth, provided the gift doesn’t exceed the annual gift tax exclusion ($18,000 per beneficiary as of 2024). Moreover, if the recipient is in a lower tax bracket, gifting an appreciated asset can lower the overall tax impact of selling it, preserving more of the asset’s value for the recipient.
Alternatively, donating appreciated assets directly to a charity or through a donor-advised fund can be an incredibly effective way to avoid the capital gains tax while also potentially realizing a valuable tax deduction. For clients deeply invested in charitable giving, this strategy aligns their investment growth with their philanthropic aspirations, enabling them to contribute more significantly to their chosen causes.
Looking to Minimize Capital Gains Taxes? Benchmark Wealth Management Can Help.
Helping our clients minimize capital gains taxes and optimize their overall tax situation is just one of the ways we add value to their busy lives. By taking the time to understand their values, goals, and full financial picture, we provide personalized, holistic guidance, setting each client on a unique path toward financial freedom.
Benchmark Wealth Management is committed to providing comprehensive financial planning and investment management solutions, ensuring our clients’ assets are handled with care. To get to know us better and see if we may be the right fit for your financial planning needs, please contact us.
Please note that the information provided includes references to concepts that have legal, accounting and tax implications. It is not to be construed as legal, accounting or tax advice, and is provided as general information to you to assist in understanding the issues discussed. Please consult your own attorney and/or accountant regarding the application of the information contained in this newsletter as to the facts and circumstances of your particular situation.
About Rick
Richard W. Stout III is managing director of Benchmark Wealth Management, LLC, with 25 years of experience in the financial industry. He specializes in financial planning and asset management for individuals, families, and institutions seeking to build and monitor durable and sustainable plans for their financial futures. Rick is a Certified Financial Planner™ professional and holds the Accredited Investment Fiduciary® (AIF®) designation. He obtained his MBA from Rensselaer Polytechnic Institute and his BA in Economics and Anthropology from the University of Connecticut. Rick has earned a Master of Science degree in Personal Financial Planning from the College for Financial Planning. He has extensive background experience in lending, credit review and analysis, and real estate and partnership management. Learn more about Rick by connecting with him on LinkedIn.
About Thomas
Thomas J. Britt is managing director of Benchmark Wealth Management, LLC, with 23 years of experience in the financial industry. He specializes in executive financial planning, retirement planning, investing, as well as the management of trusts and endowments. Thomas is a CERTIFIED FINANCIAL PLANNER™ professional. He holds the Master Planner Advanced StudiesSM, MPAS®, Certified Investment Management Analyst® (CIMA®), and Chartered Retirement Planning Counselor℠, CRPC® designations. Thomas earned a Bachelor of Science in Finance from the University of New Haven, an MBA in financial technology from Rensselaer Polytechnic Institute, and a Master of Science in Personal Financial Planning from the College for Financial Planning. He is also a proud veteran of the United States Navy Submarine Force. Learn more about Tom by connecting with him on LinkedIn.
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