Selling triggers taxes, but investors can trim the amount they
pay to Uncle Sam with some tax-wise planning. Here are five things
you need to know:
1. Capital-gains rates for the wealthy are up. The tax rate on
profits from assets held more than one year jumped from 15% in 2012
to 23.8% in 2013 for singles with adjusted gross income of $400,000
or more ($450,000 or more for married couples). Single investors
with AGI of $200,000 to $400,000 and married couples with AGI of
$250,000 to $450,000 are also paying more, at an 18.8% rate.
Advice: If your income approaches one of these thresholds, figure
the tax hit before triggering gains. Taking gains in years in which
you have less income or more deductions could save a bundle.
2. Short-term sales will cost you. If you sell a security you've
held for a year or less, you'll pay taxes on the profits at
ordinary income tax rates, which run as high as 39.6%. If you're in
the top tax brackets, you're also subject to the 3.8% Medicare
surcharge, making the top effective rate on that gain a whopping
43.4%. Advice: Unless you have capital losses to offset costly
short-term gains, try to hang on to your winners for more than one
3. You get a break on company stock in a 401(k). Most money that
comes out of retirement plans is taxed at ordinary income tax
rates. But there's an exception for employer stock in these plans.
If you take a lump-sum distribution of the employer shares, you are
taxed (at ordinary income rates) only on your "basis"--what you
paid for the shares. You will pay tax on the appreciation when the
shares are sold, but at gentler capital-gains rates. If you rolled
the shares into an IRA, you'd wind up paying taxes on that
appreciation at ordinary income tax rates when the money came out
of the IRA. Advice: If you have the option, this is a simple way to
permanently lower the tax rate on some retirement savings.
4. Your heirs get a break on taxable accounts. When you die, the
tax basis of assets in a taxable account gets "stepped up" to the
current market value. So, when your heirs sell, they won't owe tax
on appreciation that occurred during your lifetime. By contrast,
there's no step-up for money in tax-deferred accounts, such as
401(k) plans and traditional IRAs. Your heirs will pay tax at their
top brackets when they withdraw funds. Advice: Watch how you drain
your accounts. Use taxable accounts to sell stocks at a loss or
modest gain, leaving alone securities with big gains. Take the rest
from the tax-deferred accounts, which have mandatory distribution
requirements for those who are over 70½.
5. Charities love stock donations. Most charities are happy to
take your appreciated stock in lieu of cash. You get a deduction
for the current value of the stock if you have owned it for more
than a year. The charity gets the shares to sell, but because it's
a tax-exempt organization, it's not subject to capital-gains taxes.
Advice: Look at the stocks in your taxable accounts to find those
with the greatest appreciation and consider using those shares to
fund charitable gifts.