New Jersey has always been known for its relatively high property and income taxes. So high-income executives, professionals, and business owners should be thinking about year-end tax planning about now. That’s because investment decisions outside 401ks and IRAs can have potential tax implications.
As the year draws to a close, year-end capital gains planning should be high on your priority list so you have a strategy to help minimize tax liabilities for 2023.
That’s why working with a Paramus financial advisor specializing in the design of tax-efficient investment strategies is so important.
In this blog post, we will cover the following topics:
- What are Capital Gains Taxes?
- Why Review Your Investment Portfolio?
- Why Use Tax Loss Harvesting?
- How You Can Work Toward Maximizing Your Use of Tax-Advantages Accounts?
- Why Consider Charitable Contributions?
- The Role of a Paramus Financial Advisor
Read our popular Quick Guide, “Comprehensive Wealth Management for High-Income Earners in Paramus, NJ.”
What are Capital Gains Taxes?
Chances are you have been paying capital gains taxes for years when you sell appreciated investments from taxable accounts – for example, personal and joint savings accounts. This asset can be anything you want to sell (stocks, bonds, real estate, collectibles) that has increased in value since you purchased it.
Conversely, selling an asset for less than you bought it for is a capital loss.
Depending on the time frame you have owned the asset, it could be classified as short or long-term gain or loss – each with its applicable tax rate.
Short-term capital gains taxes apply to the sale of assets held for one year or less and are taxed at ordinary income tax rates. Depending on your tax bracket, this can range from 10% to as high as 37% on the federal front.
In New Jersey, these gains will also be subjected to state income tax rates, which vary based on tax brackets.
On the other hand, long-term capital gains, which apply when assets are held for more than one year, may have more favorable tax rates at the federal level, ranging from 0% to 20%, with higher earners possibly subject to an additional 3.8% net investment income tax.
New Jersey, however, treats long-term capital gains as ordinary income, so they are taxed at the same state rates as short-term gains. Strategically managing the duration of your asset holdings can significantly impact taxes when you sell appreciated investments.
Year-End Investment Portfolio Review: Addressing Capital Gains Tax Implications
You should examine your taxable investment portfolio early in the fourth quarter and develop a plan to help minimize your tax obligations. This review provides a snapshot of your investments and can uncover opportunities to help improve future results and to help avoid paying unnecessary taxes. Managing potential tax obligations may help you improve your net returns.
Here are four steps you and your New Jersey financial advisor should take when evaluating investments in your taxable accounts:
1. Review all the transactions already in 2023. Take note of realized gains and losses for short and long-term gains and losses.
2. Compare your purchase price to the current market value to determine potential tax consequences if you sell the investments.
3. Consider the time you’ve held each asset to determine the tax treatment if you were to sell the asset.
4. If the asset is still in your portfolio, discuss its retention with your New Jersey financial advisor. There may be reasons to sell the assets and redeploy the proceeds in investments with possibly a greater potential.
Being proactive is essential for mitigating your tax exposure. Consider working with a financial professional who can help you craft a strategy to help minimize taxes and improving future performance.
Why Consider Tax Loss Harvesting?
Every portfolio has winners and losers. Even losers have some value when used properly.
Tax loss harvesting is a strategic approach to help minimizing tax liabilities by offsetting capital gains taxes on the sale of appreciated property. Here are three tax loss harvesting tactics to consider deploying before year-end:
- Identify Underperforming Investments: Begin by reviewing your investment portfolio. Look for investments with a current market value that is less than what you paid for the asset.
Recognizing these “unrealized or paper” losses can offset gains from the sale of appreciated investments, helping to reduce your capital gains tax payments. While seeing a negative return on any investment is disheartening, strategically using these losses to offset gains can be a silver lining in your broader financial strategy.
- Determine the Offset Potential: Once you’ve identified these underperformers, determine your potential capital gains for the year. There is a lot of strategy when considering selling winners because your outlook has changed. Both short-term and long-term losses have specific offset rules.
Typically, short-term losses (on assets held for less than a year) will offset short-term gains, and long-term losses (on assets held for more than a year) will offset long-term gains. If you’ve exhausted gains in one category, you can use the leftover losses to offset the other. Furthermore, if you have more capital losses than gains, you can usually deduct up to $3,000 annually against other types of income.
- Avoid the Wash-Sale Rule: Lastly, be cautious of the “wash-sale” rule. This IRS rule stipulates that if you sell a security at a loss and buy the same or a “substantially identical security” within 30 days before or after the sale, the loss is disallowed for tax purposes. Your strategy must be more than just selling and quickly rebuying solely for the tax benefit.
Remember, while tax loss harvesting can be a major benefit, making decisions that align with your broader financial goals and investment strategy is equally important. A Paramus financial advisor can provide the expertise you need to assist in making the right decisions.
Why Leverage Tax-Advantaged Accounts Before Year-End?
Tax-advantaged accounts are one of the investment tools available to help reduce capital gains taxes. Here are a few ways to leverage tax-advantaged accounts before year-end:
- Maximize your contributions to retirement accounts, such as traditional IRAs, 401(k), and other tax-advantaged savings vehicles, by contributing the maximum allowable amounts. These contributions help to reduce your taxable income, and the investments inside these accounts grow tax-deferred, helping to shield your capital gains from immediate taxation.
- The maximum contribution to a 401(k) in 2023 is $22,500. This limit applies to both traditional and Roth 401(k) plans. Additionally, individuals aged 50 or older can make catch-up contributions of up to $6,500 on top of the standard limit, bringing their total allowable contribution to $29,000 in a calendar year.
- Consider a Roth Conversion: If you expect to be in a higher tax bracket when you retire, you might consider converting a traditional IRA to a Roth IRA. While you’ll pay taxes now on the converted amount, future withdrawals, including any gains, will be tax-free.
- Contribute to Health Savings Accounts (HSA): HSAs offer a triple tax advantage if you are eligible. Contributions are tax-deductible, investments grow tax-free, and withdrawals for qualified medical expenses are tax-free.
Evaluating these strategies requires careful planning and a detailed understanding of your financial situation. Consulting with a tax planning professional can help you make informed decisions to help reduce your tax liabilities for 2023 and the future.
Why Consider Using Charitable Donations?
Regarding year-end tax planning, charitable donations can be a strategy worth considering. Here’s how you can leverage your contributions to charities to counterbalance potential capital gain taxes:
- Capital gains tax is incurred when you profit from selling an asset like stocks, real estate, or other investments. By making a charitable donation, you can deduct the value of that donation from your taxable income, potentially reducing the impact of these gains.
- Consider donating appreciated property, such as stocks, real estate, or collectibles, instead of cash. You can gift to a family member or a charity. By doing so, you bypass the capital gains tax due if you sold the asset outright. As a tax-exempt entity, the charity can sell the asset without incurring the tax, ensuring the total value supports its mission.
- A Charitable Remainder Trust (CRT) allows you to donate appreciated assets and retain an income stream for the lives of both spouses. The assets become part of the trust that can sell the property tax-free, bypassing the capital gains tax) and provide you with monthly payouts from the proceeds. Upon the demise of the surviving spouse, the trust terminates, and the remaining assets go to the charitable beneficiary.
- If you’re close to the itemized deduction threshold, consider ‘bunching’ several years’ worth of charitable donations into one year. This approach can help to maximize your deductions in a given year, helping to counteract the capital gains in that period.
The Role of a Paramus Financial Advisor
Leveraging a deep understanding of the tax landscape and personalized insights into your financial situation, they can help advise you on timely asset sales or purchases, tax-loss harvesting, and the efficient use of tax-advantaged accounts.
By actively working with such an advisor, you can optimize investment decisions, potentially avoid unnecessary tax burdens, and keep more of your hard-earned money. It’s a collaborative effort that blends professional acumen with a keen focus on your unique financial goals and needs.
Engaging with a CERTIFIED FINANCIAL PLANNER™ Professional provides added assurance, as they bring rigorous training, current knowledge, and adherence to high ethical standards. These professionals don’t just provide generic advice; they consider financial aspirations and craft tailored wealth management strategies.
About Integra Wealth Management
For over 20 years, Integra Wealth Management has been providing customized wealth management services for successful individuals and families.
In 2003, our founder, Rich Dragotta, stepped away from the conventional wirehouse’s confines. Instead, he aligned with LPL Financial as an Investment Advisor Representative. This shift wasn’t just a business move but about gaining the autonomy to handpick products and services that genuinely catered to each client’s unique financial landscape.
Gone were the days of corporate agendas clouding his vision.
Our approach isn’t just about managing investments but total wealth management. This holistic viewpoint has fueled our firm’s remarkable growth. Our commitment? Offering all-encompassing wealth management services tailored for high-net-worth families, top-tier executives, and budding entrepreneurs.