If you’re fortunate to have an imbedded capital gain, either from company stock or other investments held during the last decade bull-market, you may be aware that taxes will be owed once you sell. These are capital gains and taxed at lower rates, 0%, 15%, and 20%, depending where you end up on the ordinary income marginal tax rates. If you’re lauding to pay the tax, there are a few ways to eliminate the capital gain.
Gift stock to a charity
The Tax Cuts and Jobs Act (TCJA) in 2018 increased the standard deduction so significantly that small donations to charities are less likely to have an impact on your taxes. Gifting appreciated stock to a Donor Advised Fund can help you remove the gain, sell the stock, and transfer the proceeds to the public charity of choice. You also receive the deduction on the value of the gift at the time of transfer, if the gift is greater than the standard deduction.
Sell losses to offset gains
If you have investments with a capital loss, selling those positions would offset any gains realized in the same year. You can sell all your losses and carry those forward each year to offset future gains forever, until the losses run out. This strategy can also provide a $3,000 deduction against ordinary income each year until all losses are used.
Sell in a low income year
If you are not working or otherwise are in a low income year, it may be worthwhile to sell your appreciated stock. If your income is less than $38,600 (single), $77,200 (married filing jointly), then you could realize capital gains at 0%.^1
Invest in Opportunity Zones
Out of the same tax package that came out this year, Opportunity Zones were created to encourage investment in low income and depressed areas in the United States. The appeal is, along with a potential for profit, investing in an Opportunity Zone could eliminate a prior capital gain. For instance, if you sold appreciated stock this year and subsequently used the proceeds to invest in an Opportunity Zone, you could defer your capital gains taxes and substantially eliminate the tax once the investment in the Zone matures, at least five years until the TCJA sunsets. This could be a good strategy for those who want to diversify out of stocks, eliminate a current year capital gain, and receive tax-free treatment on future gains.
At Eureka Wealth Management, I help my clients identify opportunities that reduces tax obligations and improve the potential for profit. I also help plan for the future, review insurances, and manage investments. Call for a free initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com. For specific tax questions about your situation, consult your tax advisor.