Your Retirement Center

Investment Tax Planning

Don't overlook the tax consequences when you make investment decisions.

Professional advisers recommend that you make investment choices based on factors such as return on investment, level of risk, and portfolio diversification — not on avoiding income taxes. Still, investing your money to gain the best possible return after taxes is a vital part of any investment strategy.


A capital asset is any property you can buy and sell. That includes stocks, bonds, and mutual funds, your home and other real estate, jewelry, cars, and collectibles. A capital gain is the amount of your profit when you sell an asset for more than it cost you. You have a capital loss, on the other hand, if you sell an asset for less than you paid to buy it.


If you own a capital asset for a year or less before you sell, any appreciation, or increase in value, will give you a short-term capital gain. Short-term gains are taxed as ordinary income, at your regular tax rate.

A capital gain is the profit produced by selling a capital asset for more than it cost you at purchase.

But if you own certain assets, such as securities, for more than a year before you sell at a profit, you have a long-term capital gain. Generally, those gains are taxed at a maximum rate of 15% if your marginal tax rate is 22% to 35%. If your marginal rate is 10% or 12%, capital gains are taxed at 0%. However, higher rates do apply for people with higher incomes whose marginal rate is up to 37%. If you file your federal income tax return as a single and have an adjusted gross income (AGI) of $445,851 or higher in 2021, you pay a capital gains tax rate of 20%. If you are married and file a joint return, the 20% rate applies if your AGI is $501,601 or higher. In addition, if you file as a single and have an AGI of $200,000 or higher, you pay an additional surtax of 3.8% on investment income, including capital gains. If you're married and file a joint return, the 3.8% surtax applies if you have an AGI of $250,000 or higher. In other words, there are actually the equivalent of four of five possible capital gains rates: 0%, 15%, 18.8%, and 23.8%.


You can combine your capital gains and capital losses - short-term gains with short-term losses and long-term gains with long-term losses — to offset, or reduce, the gains on which you owe tax. You may even wipe out all your gains and have a net loss. If you have a net loss, you may also be able to reduce your ordinary income, such as your salary, but there's a cap of $3,000 per year ($1,500 if you're married and filing separate returns). If your capital loss in any year is greater than that amount, you can carry over the excess and deduct it against gains or ordinary income in later years.

FIGURING GAIN OR LOSS You figure gain or loss by subtracting your basis from the proceeds of a sale. Basis is the price you paid for the item, plus the expenses of buying, holding, and selling it. For example, the commissions and costs of an investment transaction are subtracted from the proceeds of a sale when you figure a gain. If you received the item as a gift, your basis is the same as the giver's was. If you inherit an asset, your basis is the market value on the date the giver's estate was valued. That is known as a step up in basis.
PROCEEDS The amount you receive when you sell your asset
- BASIS The original cost of the asset, plus the cost of buying, holding, and selling it
Here's how you would figure a capital gain:
$22,000 Gross proceeds from the sale of stock
- $20,000 Amount you paid for the stock
- $385 Broker's commission and fees on sale
= $1,615 Your capital gain


While you're holding an investment, you don't pay tax on any increase in its value, or what's known as your paper profit or unrealized gain. The market price of a stock you bought for $5 a share may climb to $50, but the tax on that gain is deferred until you sell the stock and collect the proceeds. At that point, your gain is taxed at your capital gains tax rate. Of course, any profit you don't realize could disappear if the market value of the stock or other asset drops.

THE LONG AND THE SHORT OF IT An investor in the 33% tax bracket sells stock resulting in a capital gain of $20,000. She saves $3,600 if she has a long-term gain.

Sell on or before one year

$20,000 taxed at 33% = $6,600 Tax due Short-term gains taxed at your regular income tax rate.

Sell after one year

$20,000 taxed at 15% = $3,000 Tax due Long-term gains taxed at a rate of 15%


Passive income or passive losses come from businesses in which you aren't an active participant. These include limited partnerships, rental real estate, and other types of activities that you don't help manage. Losses from passive investments can be deducted from income you earn on similar ventures. For example, you can use losses from rental real estate to reduce gains on limited partnerships. Or you can deduct those losses from any profits you realize from selling a passive investment. But you can't use passive losses to offset ordinary income or capital gains. The rules governing passive income are complex. You should consult with your own tax adviser about them.

THE GAIN OF GIVING If you make a charitable donation of property that has increased in value, such as stock or real estate, you may be able to deduct the market value on your income tax return and avoid capital gains tax on the appreciation. Check with your tax adviser about any restrictions that may apply to the amount you can deduct. In contrast, if a stock's value has dropped, you may decide to sell it, take the capital loss, and donate the proceeds of the sale. Then you can use the loss to offset other gains. Once your child is 19, or 24 if he or she is a full-time student, you may be able to save taxes by giving the child stock or other assets that have appreciated in value while you owned them. If the child sells the asset, he or she may pay capital gains tax at a lower rate than yours. However, you'll want to keep the value of each year's annual gift to each child below $15,000 in 2021, or $30,000 if you're married and file a joint return, to avoid potential gift taxes.
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