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Tax Strategies for Investments: Controlling Timing for Capital Gains

Long-term investment success is about more than the initial investment decision. As tax professionals know, timing can have a dramatic impact on the tax consequences for investment activities—but timing can also be used to your clients’ advantage. Remember that appreciation on investments is not considered taxable income until that investment is sold. Though there has been a lot of talk about whether to introduce a tax on unrealized gains, currently no such tax exists on the federal level. This means that until an asset is sold and a gain is recognized, there is still an opportunity to use proactive tax planning to mitigate that final tax impact. 

Below is a quick overview of how to leverage timing in the sale of an asset and which taxes to look out for when it comes to investments. 

Tips for Strategic Timing

The primary tax reduction goal when it comes to capital gains is to move them from short-term to long-term. Short-term capital gains are taxed at ordinary income tax rates, which will be 22% or higher for middle-to-upper-class taxpayers. Long-term capital gains are taxed at a rate of 0%, 15%, or 20% depending on your income. 

Because an asset has to be held for at least a year to be considered “long-term,” the first simple strategy is to time the sale so that the gain qualifies for that lower tax rate. If there is no other significant disadvantage to delaying the sale of an asset, the taxpayer can just hold onto it until the tax outcome is to their advantage. 

A second timing strategy applies to loss harvesting—selling securities at a loss in order to offset taxes on other assets sold at a gain. If the taxpayer saw sizable capital gains one year, find out if there are any unrealized losses in their portfolio. Do the math to determine if selling these assets at a loss could offset those large gains. These counterintuitive strategies that can end up greatly reducing tax liability is a way Certified Tax Planners provide high value to their clients.

Factoring in Tax Brackets

A key factor in tax planning for investments is to consider the income thresholds for long-term capital gains rates. Fortunately, the highest 20% rate doesn’t kick in until the taxpayer’s income nears $500,000 ($492,300 for single filers and $553,850 for married filing jointly). Taxpayers with less than $44,625 in taxable income will be exempt from taxes on any capital gains received within the year. 

High-income earners may also be subject to the Net Investment Income Tax (NIIT). For single taxpayers who have over $200,000 in modified adjusted gross income (or $250,000 for married couples), any net investment income above the threshold will be taxed at 3.8%. Common types of net investment income include interest, dividends, capital gains, rental and royalty income, and passive activity income. 

Avoiding the Alternative Minimum Tax

Keep in mind that if a taxpayer is seeing substantial net long-term gains one year, this may trigger the Alternative Minimum Tax (AMT). If the taxpayer has high income and the majority of that income is coming in at a tax-advantaged rate (15% or 20%), the AMT exists to ensure they are paying a fair minimum amount of tax. 

Proactively planning for the possibility of AMT can be tricky since the threshold is a moving target. There is no exact science to avoiding AMT. Your best bet is to rely on tax software to calculate the “tentative minimum tax,” which is equal to:

[Taxable income based on AMT rules – AMT exemption] x AMT tax rate – AMT foreign tax credit

The key is to evaluate AMT throughout the year if there is risk of nearing that threshold. If your client starts to get close to that limit where AMT kicks in, look into ways to defer capital gains and otherwise reduce their taxable income. 

The “Death Tax Plan”

Though this concept has a morbid name, the potential tax savings makes it worth investigating. For taxpayers who are well into retirement, thinking through estate plans could be the best tax strategy available. If they have unrealized capital gains, when those assets are passed on to their heirs, the assets will receive a “step up in basis.” This means that the heirs receive that asset at its current value, and in a way, the taxpayer has completely avoided tax on them. Be mindful that an estate tax may still be due if their estate exceeds the value threshold for that year

If the asset is depreciable and income-generating, like a rental property, this can especially benefit the heirs who may be able to claim that depreciation and lower their tax bill. Older taxpayers need to be cautious when making plans and apply strategy rather than being reactive. While it may seem wise to add their children to their bank accounts or the deed to a house, doing so will eliminate those “death tax plan” benefits. An alternative you might suggest is to appoint their children as power of attorney. Power of attorney allows that representative to take care of financial issues, make decisions about selling, and otherwise set up protection against scammers or people who commit elderly abuse—and the taxpayer won’t lose the tax benefits of holding onto valuable assets until their passing. 


With real estate, it’s location, location, location. With capital gains taxes, it’s timing, timing, timing. You can provide the greatest value to your clients by pushing them to plan for the future, including intentionally assessing the gains they are likely to see, the losses they can leverage, and the timing for any assets they are looking to sell. To ramp up your knowledge on the best tax strategies for investments, sign up to become a Certified Tax Planner today.

Image by Sergei Tokmakov, Esq. https://Terms.Law from Pixabay

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