2013 Year-End Tax Planning for Your Investments

December 4, 2013

While tax consequences should never solely drive investment decisions, it is critical that they be considered — especially this year: higher-income taxpayers may face more taxes on their investment income in the form of the returning 39.6% top short-term capital gains rate and 20% top long-term capital gains rate and a new 3.8% net investment income tax (NIIT). You can substantially cut tax on any gain by holding on to an investment until you have owned it more than one year so the gains qualify for long-term treatment.

Here are some other tax-saving strategies:

  • Use unrealized losses to absorb gains.
  • Avoid wash sales – these happen when you sell an investment, realize a loss, but within 30 days reinvest in the same or virtually similar investment; these losses are not deductible.
  • See if a loved one qualifies for a lower tax rate – gifting the investment to them could be an effective way to lower the tax bite, but it needs to be considered in conjunction with a broader financial plan.

Many of the strategies that can help you save or defer income tax on your investments can also help you avoid or defer NIIT liability. And because the threshold for the NIIT is based on modified adjusted gross income (MAGI), strategies that reduce your MAGI — such as making retirement plan contributions — can also help you avoid or reduce NIIT liability.

Questions about year-end tax planning for your investments? Contact us at JPS today.