This is the time of year when many of us take stock of our lives, and it’s not a bad idea to apply that same introspection to your investment portfolio. The stock market has been surprisingly resilient, but that doesn’t mean everything in your portfolio escaped unscathed. Some last-minute trades could lower your 2016 tax bill, and you may be able to reap some tax-free profits, too.
If you have stocks or mutual funds in a taxable account that have fallen from the price you paid, you can sell them and use the losses to offset profits you’ve locked in from selling other investments during the year. Losses will also come in handy if you have unexpected distributions from your mutual funds. Every December, funds pay out dividends and capital-gains distributions that have built up during the year. In taxable accounts, such payouts are taxable, even if you reinvest them in additional shares.
If losses exceed your gains (or you don’t have any gains to offset), you can use up to $3,000 of losses to offset ordinary income. Unused losses can be rolled over to future years.
Even if you don’t have losses to harvest, you may be able to cash in some of your top performers tax-free. Taxpayers in the 10% or 15% tax bracket qualify for a 0% long-term capital-gains rate. In 2016, married couples filing jointly with taxable income of up to $75,300 are eligible for the 0% capital-gains rate, and singles with taxable income of up to $37,650 can cash in winners tax-free. Recent retirees who have been living off their cash reserves are good candidates for this tax break, says Kevin Meehan, a certified financial planner in Itasca, Ill.
But don’t get carried away. The sweet 0% rate applies only to the extent that your gains don’t push your taxable income into the 25% bracket; profit that falls in that bracket is taxed at 15%. Let’s say you estimate your taxable income for the year on a joint return (before a sale) at $70,000. If you sell a stock for a $6,000 profit, the first $5,300 would enjoy the 0% rate, but the other $700 would be taxed at 15%.
Try to sell for enough profit to fully exploit the 0% rate. If you don’t want to part with the stock, you can immediately buy it back, and any future tax would be based on today’s higher purchase price. Keep in mind, too, that if your state has an income tax, you may owe state taxes on your capital gains, even if Uncle Sam turns a blind eye.
If you won’t fall into the 10% or 15% tax bracket, perhaps someone in your family will—an adult child, for example, or an elderly parent. In that case, appreciated stocks make great gifts. Your family member (or anyone else you want to help) can sell the securities and use the 0% rate as long as the profit falls in the 10% or 15% bracket. (You can also give appreciated stock to charity; see below.) In 2016, you can give cash, securities or other property valued at up to $14,000 to as many people as you want without filing a gift-tax return or dipping into the credit that will protect your estate from the federal estate tax.
Most taxpayers don’t have to worry about the federal estate tax. The 2016 estate-tax exemption, which is adjusted annually for inflation, is $5.45 million, or $10.9 million for married couples. But 11 states and Washington, D.C., have lower estate-tax thresholds than the federal government. New Jersey, for example, taxes estates valued at as little as $675,000.