Managing Tax Implications
After a challenging year, many Stableford clients lowered their tax liability and better positioned their portfolio going forward through a strategy known as tax loss harvesting. By selling investments at a loss and replacing them with similar holdings we reduced taxable capital gains, potentially offset up to $3,000 of ordinary income, and in some scenarios generated a tax loss carryforward to offset future gains.
Every investor is unique. The right plan will vary based on the nuances of the individual’s portfolio and situation. That is where our custom asset management process is advantageous. Our asset allocations are managed between six strategies, although more labor-intensive, and more appropriate, especially within this current volatile investment backdrop.
Tax Explanation of Capital Gains & Losses
Managing the tax implications of your investments are key elements of the Stableford Capital investment process. Whether you are a Family Office, Family Limited Partnership, Family Trust or Individual account, the managing of capital gains and losses is the same. Potential tax implications of a particular investment are considered before sale and regularly monitored. Part of our quarterly re-balance process is done with long and short-term tax consequences in mind.
Capital gains and losses are classified as short-term or long-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
Short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain. The difference between your capital gains and your capital losses for the tax year is called a “net capital gain.” Short-term capital gains are taxed as ordinary income; long-term capital gains are taxed at 0%, 15%, or 20% according to graduated income thresholds.
Taxes owed on capital gains are generally due for the tax year of the sale. For example, if you sell a stock or any asset for a $10,000 profit in 2022, be prepared to pay when you file in 2023. If you sell in January of 2023, vs. December 2022, the tax will be due when your tax year 2023 return is due. In this case that will be April 2024.
Only a capital gain that is “realized,” or a stock sold for profit, are subject to capital gains tax (that doesn’t mean capital gains only apply to stocks) This means you do not incur taxes on any unsold, or “unrealized,” investment gains held in your portfolio. This allows an asset to grow in value over time without being taxed until after it is sold.
How Does Tax Loss Harvesting Work
We use investment capital losses to offset gains. For example, if a particular Stableford strategy sold a stock for a $10,000 profit this year and sold another at a $4,000 loss, you’ll be taxed on capital gains of $6,000.
If your losses exceed your gains, you can use the remaining losses to offset up to $3,000 of ordinary income ($1,500 for those married filing separately). Any additional losses over $3,000 can be carried forward to offset future capital gains and up to $3,000 of ordinary income per year. There is no limitation on using a capital loss carryforward to offset gains up to the amount of the loss carryforward.
Even if you don’t currently have any gains, there are benefits to harvesting losses now, since they can be used to offset income or future gains with no expiration date.
What’s Ahead? 2023 Tax Law Changes
Tax Bracket Adjustments – The tax brackets remain the same but there are significant upward changes in tax brackets due to inflation with each tax bracket increasing 7.1%. Some people might find themselves in a lower bracket for once.
Accelerated Retirement Savings – Both HSA and 401(k) contribution limits are increasing. The 401(k) contribution limits are rising to $22,500 for workers under 50 and $30,000 for those 50 and older. You should also know that if your employer offers a 401(k) match, the money your company puts into your account will not count toward these limits. In 2023 HSA limits max out at $3,650 if you have self-only coverage and $7,300 for family coverage. There’s also a $1,000 catch-up for savers 55 and over.
Increase in Standard Deduction – The standard deduction for single filers will increase by $900 to $13,850 in 2023. For married couples filing jointly, it will increase by $1,800 to $27,700 in 2023.
Increased Deductions for Small Business Owners – Section 199A deduction for pass-through income, which is known as qualified business income (QBI). The QBI deduction allows qualifying taxpayers to deduct 20% of their business income if they work as a pass-through business, sole proprietorship or other similarly situated tax entity. The QBI threshold will increase by almost 7%.
Gift Exclusion – The annual exclusion for gifts increases to $17,000, up from $16,000 for 2023.
Please Be Vigilant This Holiday Season
It is my hope that you are relaxing and sharing in goodwill with friends and family this Holiday Season. But some bad actors use the holidays to take advantage of people’s generous spirits. Scammers frequently target the older and other more vulnerable members of our communities. They pretend they are from a particular government agency to steal your money or personal information.
Caller ID, texts, or documents sent by email may look official, but they are not. Fraudsters are calling to verify information about the 2023 cost-of-living adjustment for people who get benefits. Remember, this adjustment is automatic, and a beneficiary does not need to verify anything. Social Security won’t ask you to provide information or money to get your benefit increase. Know that how we do business with you doesn’t change because it’s the holidays. We may email you, but we will never ask for personal information via email or text.
Speaking of Tax Preparers…
Stableford Capital offers Tax Planning and Tax Preparation services through our affiliate, Stableford Tax, as part of our holistic guidance that considers your complete financial picture. Stableford Capital coordinates your finances, taxes, and assets to reduce stress and frustration, help you make more informed decisions, and maximize after-tax financial returns. If you would like to learn more about our tax preparation services offered through Stableford Tax, please feel free to contact me.
-Mark
