Investor Education | Reaping tax benefits of year-end sales

The seeds were sown when you invested in securities that are currently showing a paper gain or loss. From a tax perspective,it’s a good time to harvest gains or losses, depending on your situation, as the year winds down.

Of course, these decisions should take all relevant economic factors into account. Although taxes are important, they are not the be-all and end-all.

Basic premise:  Capital gains arising from sales of securities are offset by losses from securities sales, and vice versa.  In brief, your gains and losses are “netted” at the close of the year and reported on your 2015 tax return. But before that occurs, you may have the flexibility needed to skew the results in your favor.

For starters, short-term capital gains from security sales and other capital assets you’ve owned for a year or less are taxed at ordinary income tax rates,with a top rate of 39.6%. Long-term gains from sales of securities held longer than one year are taxed at a maximum 15% tax rate for most investors.  Those in the two lowest ordinary income tax brackets benefit from a 0% rate.

For investors in the top 39.6% bracket, the maximum tax rate on long-term capital gains is 20%.  This is still significantly lower than the top tax rate on ordinary income.

Note that capital gains may have other implications.  For instance, the gains you realize from securities sales may trigger or increase liability for the3.8% surtax on net investment income (NII). The NII surtax applies to certain high-income investors.

Conversely, if you realize a capital loss from the sale of securities, the loss is first used to offset capital gains and then up to $3,000 of ordinary income.  Any remainder is carried over to 2016, when it can offset capital gains plus up to $3,000 ordinary income.  Losses may be carried forward in this manner indefinitely until they are exhausted.

This is traditionally the time that investors start perusing their portfolios to identify securities that can be sold at a loss to absorb capital gains recognized earlier in the year.  The harvesting loss  strategy is  especially valuable for offsetting  short-term gains taxed at ordinary income tax rates.

Therefore, the optimal tax strategy for 2015 depends primarily on your capital gains and capital losses up to this point in the year,  your current tax rate and your expected tax rate for next year.  For example, if you expect to be in the 35% tax bracket this year and then jump to the 39.6%bracket next year, you might realize more long-term capital gains this year to benefit from the 15% tax rate. Conversely, if the situation is reversed — you anticipate that you will reach the top 39.6% rate this year and slide back into the 35% bracket or even lower next year — you might decide to postpone gains and/or harvest losses to offset this year’s gains. In addition, you must take all other personal factors into account.

Reminder:   Continue to adjust your strategies to meet your changing needs.  With professional assistance,you can harvest capital losses or gains between now and the end of the year to your tax advantage.

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