2013 has been a wonderful year for U.S. stocks, which are up roughly 25% year to date. However, if you’re planning on selling appreciated equity investments before the year’s end, 2013 may not be such a great year for your tax bill.
For tax year 2013, the capital gains tax rate – the tax you pay on the amount an asset has appreciated between the time you bought it and sold it — has increased to 20% from 15% for top earners. And there’s also a new 3.8% net investment income surtax for those with high levels of investment income and over a certain income range.
The good news, however, is that there are ways to get rid of the appreciated stock around year’s end and still avoid a hit on your 2013 tax bill, according to Mark Balasa, a principal at fee-only wealth management firm Balasa Dinverno Foltz LLC in Itasca, Ill., and my go-to source for tax-related questions.
While it’s a little too late in the year for some of the possible capital gains tax avoidance approaches and others can be complicated, here are three somewhat simple strategies Mr. Balasa says it’s not too late to consider.
1. Move your gains to next year. If you think your income is going to be less in 2014 than 2013, you can wait to sell the stocks until after the New Year, deferring paying taxes on your capital gains until your 2014 tax bill. “This approach all comes down to doing the income projections for yourself and running some ‘what if’ scenarios,” says Mr. Balasa.
For instance, he says, someone making a $250,000 salary in 2013 who wants to exercise stock options and plans to retire in 2014 and anticipates lower income in retirement may want to wait until January to make the investment move. Why? Based on these income projections, the stocks’ capital gains would be taxed at 15% in 2014 vs. 23.8% this year.
2. Donate the securities. If you were planning to sell the equity investments and donate the proceeds via check to a charity, consider donating the stocks or stock funds directly to your chosen charity. Most charities these days accept such donations, which aren’t subject to capital gains taxes and which also can mean an extra deduction on your tax bill. “Some charities need time to do the paperwork, so the sooner you can do the donation in December, the better,” says Mr. Balasa, who suggests making such a move this week rather than closer to the Christmas holiday.
3. Sell losers along with your winners. While it may be hard to find stock losers in a year like this one, that’s not to say that you may not have incurred losses somewhere in your portfolio. With this strategy, you’d sell stocks, bonds, gold or other investments that you’ve lost money on. “There are some asset classes that did take it on the chin in 2013,” Mr. Balasa points out. Then, you could use those capital losses to help offset the capital gains on your tax bill.
So what’s on my to-do list? I especially like option #2. As the year draws to a close, many of us are thinking about getting those last charitable contributions in before the ball drops in Times Square. If you’re like me, though, you’re used to just taking out the checkbook and writing checks. Mr. Balasa’s tip is a reminder that there can be some advantages to donating appreciated stock instead.
Sue Thompson, CIMA, Managing Director, is Head of the Registered Investment Advisor Group, overseeing the firm’s iShares and 529 sales efforts with registered investment advisors, family offices and asset managers. Sue is a regular contributor to The Blog. You can find more of her posts here.
Source: Mark Balasa, BlackRock