Taming Investment Taxes

Posted on 11-21-2019

This week, Craig Siminski, of CMS Retirement Income Planning, shares an article explaining how investments are taxed, and which strategies may help improve a portfolio’s tax efficiency:

The Tax Cuts and Jobs Act lowered the marginal tax rates that apply to ordinary income, such as wages and interest from bonds and savings accounts, for 2018 through 2025.

Fortunately for investors, capital gains and qualified dividends still receive preferential tax treatment.

Although your investing strategy should be based primarily on your financial goals, time horizon, and risk tolerance, it’s important to pay attention to the tax implications of your investment decisions. This may be more complicated than it first appears.

For example, income from investments held in taxable accounts could push more of your overall income into a higher marginal tax bracket or beyond a threshold that would trigger taxes on Social Security benefits and higher Medicare premiums.

Here are several strategies that could help reduce your overall tax burden:

Capital Gains and Dividends

Stocks sold for a profit may be subject to the capital gains tax. Long-term capital gains are profits on investments held for more than 12 months. Qualified dividends (from stocks held for at least 61 days within a specified 121-day period) are subject to the same tax rates as long-term capital gains. Nonqualified dividends and short-term capital gains are taxed as ordinary income.

High-income taxpayers may also be subject to a 3.8% net investment income tax on capital gains, dividends, interest, royalties, rents, and passive income if their modified adjusted gross income (AGI) exceeds specific thresholds ($200,000 for single filers or $250,000 for joint filers).

Strategy: If you have realized net capital gains from selling stocks for a profit, you might avoid taxes on some or all of your gains by selling losing positions by the end of the year. Any losses over and above the amount of your gains can be used to offset up to …

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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 21 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.

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