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How to Help Clients Avoid Capital Gains Taxes 


What you need to know

  • Donating valued stocks, ETFs, mutual funds and other securities offers a double tax advantage.
  • Capital losses that exceed capital gains can be used to offset up to $ 3,000 of other taxable income.
  • As always, do what is best for the overall financial situation of the client.

With a look for higher taxes on capital gains according to Biden’s tax proposal, financial advisors will want to look for ways to help their clients avoid these higher taxes on stocks, inherited assets and other assets.

Biden’s tax proposal would increase long-term capital gains tax rates to 39.6% for those earning $ 1 million or more a year. When you add Net Investment Tax (NIIT) for high-income taxpayers of 3.8%, this raises the highest long-term capital gains tax rate from the current 23.8% to 43.4%.

Here are some ways you can help your clients avoid or reduce their capital gains tax. To see also : Why Today’s Retirees Need to Pursue Tax-Minimization Strategies.

This is a tax-smart way for your customers who have a charity to donate money even at current rates. Read also : FINANCE | You’ve got more time to fully fund IRA | Breaking News. Donating valued stocks, ETFs, mutual funds and other securities offers a double tax advantage, so to speak.

First, the market value of the securities at the date of the grant serves as a tax deduction for charitable purposes, provided that your client qualifies for the classification of deductions for that tax year. Second, there is no capital gains tax on donated property. Even at current capital gains tax rates, capital gains taxes on shares of a valued stock on an ultra-low basis can be significant.

In addition to making a direct donation to a charity, your clients may also consider donor fund (DAF). Donation of valued assets to DAF offers the same tax benefits to clients as a direct charitable donation. With the help of DAF, donated assets are managed professionally, and clients can donate to accredited charities over time, earning tax relief in the year the money is transferred to DAF.

While most people think of charitable donations in terms of valued stocks, mutual funds, ETFs, and other securities, other valued funds can be donated directly to organizations or the DAF. These assets may include works of art and collectibles, real estate and more.

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Use tax collection

Be sure to use tax loss collection when appropriate. Collecting tax losses involves incurring tax losses on holdings and using those tax losses to offset capital gains. This can be done during a regular review of the client portfolio to determine if a rebalancing is needed.

Some advisors will look at their clients ’taxable accounts to seek collection of tax losses during the year and“ bank ”those losses for use in offsetting future realized capital gains. On the same subject : A smart way to save for retirement in Illinois could get even smarter | Editorial. Capital losses that exceed capital gains can be used to offset up to $ 3,000 of other taxable income. All remaining unused losses can be carried forward.

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Be smart about the location of the property

Asset location refers to types of investments in various accounts, such as taxable accounts and retirement accounts such as the IRA and 401 (k) s. This has always had to be taken into account during tax planning for clients. If the proposed higher capital gains tax rates are enacted, this will become a bigger problem for affected clients.

It is common wisdom to hold assets with the potential for large capital gains, such as shares, in taxable accounts, and income-generating assets, such as bonds and others, in taxable retirement accounts. With current long-term capital gains rates at preferential levels, these gains would be taxed at a lower rate than the regular tax rates of most clients.