Investment Tax Planning
good news, for many people, is that 2014
is shaping up as another positive year
for stocks, as of this writing. Stocks
have advanced substantially since their
low point in early 2009, and many investors
are now sitting on large paper gains.
bad news? The grim tidings haven't come
yet, but many investors fear that they
will. Stocks have come crashing down from
previous bull markets in early 2000 and
late 2008-that might happen again in 2015,
2016 or 2017. No one can accurately predict
what tomorrow will bring, but many observers
see the stock market as overvalued now,
likely to fall back.
investors might want to take some stock
gains now, as a precaution against possible
future price declines. In fact, some investors
already may have taken gains as the market
indexes reached record highs.
gains in taxable accounts can trigger
income tax, though. As noted previously
in this issue in the article, "A
Tale of Two Couples," high-income
taxpayers could owe 20% on long-term capital
gains, plus a 3.8% surtax and any applicable
state tax. What's more, adding to your
income might trigger other taxes elsewhere
on your return.
The traditional solution is to take capital
losses as well as gains.
1: Counting trades already made this
year, trades he'd like to make by year-end
and anticipated distributions from his
stock funds, Nick Morton expects to have
a total of $20,000 in long-term capital
gains in 2014. If Nick has $25,000 worth
of losses in his portfolio, he could take
them by year-end and wind up with a $5,000
net capital loss for the year.
a net capital loss, Nick would owe no
tax on the gains he has taken and plans
to take. He could deduct $3,000 of capital
losses (the maximum allowed) from his
income on his 2014 tax return, cutting
his tax bill, and carry over the excess
$2,000 capital loss for tax benefits in
That is, Nick could do all this if he
has $25,000 of losses in his portfolio.
After a lengthy bull market, however,
Nick might not have losses to take. Even
if Nick had taken huge amounts of losses
in 2008-2009, when the market crashed,
he might have used them all by now, offsetting
gains and deducting losses in the intervening
might Nick do if he has no old losses
to use and no opportunity to take new
losses? He might donate the stocks he
plans to sell to charity (see the article,
"Year-End Charitable Tax Planning"
later in this issue). Nick also might
give shares to family members in lower
tax brackets (see the article, "Year-End
Family Tax Planning," later in this
none of these various strategies are practical
for dealing with Nick's capital gains,
he might simply postpone taking any more
gains until January 2015. That approach
won't decrease his 2014 tax bill, but
it will give Nick a full year to develop
strategies to avoid tax on those gains.
Source: November 2014 AICPA Client