Southwest Florida's Health and Wellness Magazine Health and Wellness Articles
Courtesy of: Juan Ocanas, Financial Advisor at Morgan Stanley
You likely hope the investments you hold will rise in value. Still, you have to be aware of how increases in the value of your investments can trigger a tax bill when you sell the investment. Capital gains are generally the profits you realize when you sell an investment that is a capital asset for more than you paid for it, whereas capital losses are generally the losses you realize when you sell an investment that is a capital asset for less than you paid for it.
When you have a capital gain, you may have to pay tax on the gain at capital gains tax rates. Which tax rate applies depends in part on how long you held the asset. Generally, if you hold a capital asset for more than a year, gains on that asset are eligible for long-term capital gains rates, while gains on investments you sold in a year or less are considered short-term. Generally, the tax rate is higher on short-term capital gains.
There are moves you can make to help reduce or mitigate the amount of taxes you will pay on your capital gains, including holding assets longer and tax-loss harvesting. You can also choose investments that may have a tax-favorable profile.
Delay Selling the Asset
One way to defer tax payments on gains and potentially increase your overall investment return is simply to delay selling an asset that is rising in value in order for any gains to be eligible for long term capital gains tax rates when you sell the asset. Paying less in taxes can leave more assets in your investment account, and may result in higher returns over time.
Tax-Loss Harvesting
Current U.S. federal income tax law allows you to offset your capital gains with capital losses you’ve incurred during that tax year, or with capital losses carried over from a prior tax year. Let’s say that you earn a profit of $30,000 by selling your shares of Fund A. Meanwhile, your shares of Fund B are down by $15,000. By selling Fund B, you can use those losses to partially offset your gains from Fund A—meaning you’d only owe taxes on $15,000 of net gain instead of $30,000. Note that if you have an overall net capital loss for the year, you can deduct up to $3,000 of that loss against ordinary income. Any excess net capital loss can be carried over to subsequent years to offset future capital gains or ordinary income up to $3,000 per year.
Generally, short-term capital gains are taxed at a higher rate (up to a maximum rate of 37%) than long-term capital gains, which are taxed at a maximum rate of 20%. So, to the extent possible, tax-loss harvesting can likely make a bigger difference if you have invested in strategies that see high turnover and thus more short-term gains.
If you engage in tax loss harvesting, you must also keep in mind the “wash sale” rules. Under these rules, if you purchase the same or substantially identical securities within 30 days before or after the sale of the securities that generated the loss, the loss will be disallowed.
Consider Tax-Advantaged Investment Options
Another way to try to reduce the expected taxable realized gains from your investment portfolio is by considering tax-advantaged investment options. For example, the interest on municipal bonds is typically free from federal income tax, as well as state and local taxes for residents. Certain investment products, such as tax-efficient mutual funds, may be managed to limit the number of taxable events within the portfolio.
With so many choices to make, it can be easy to overlook potential ways to reduce the amount of taxes on your capital gains. A Financial Advisor can help you assess the available options as well as provide guidance on a broader investment strategy that’s tailored to your individual financial goals.
Juan Ocanas, CRPC®
First Vice President Senior Portfolio Manager
Family Wealth Advisor
Financial Planning Specialist
Financial Advisor
NMLS 641775
Morgan Stanley Naples Branch
(239) 449-7853
advisor.morganstanley.com/the-calleja-group
Disclosures
Article by Morgan Stanley and provided courtesy of Morgan Stanley Financial Advisor.
Juan Ocanas is a Financial Advisor in Naples at Morgan Stanley Smith Barney LLC (“Morgan Stanley”). He can be reached by email at Juan.Ocanas@MorganStanley.com or by telephone at (239) 449-7853. His website is
https://advisor.morganstanley.com/the-calleja-group
This article has been prepared for informational purposes only. The information and data in the article has been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be appropriate for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
This material has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies discussed in this material may not be appropriate for everyone. This material has been prepared for educational purposes only. Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. Individuals are urged to consult their personal tax or legal advisors to understand the tax and legal consequences of any actions, including any implementation of any strategies or investments described herein. Interest on municipal bonds is generally exempt from federal income tax. However, some bonds may be subject to the alternative minimum tax (AMT). Typically, state tax-exemption applies if securities are issued within one’s state of residence and, local tax-exemption typically applies if securities are issued within one’s city of residence. The tax exempt status of municipal securities may be changed by legislative process, which could affect their value and marketability. Fixed Income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall. Investing in the market entails the risk of market volatility. The value of all types of securities, including mutual funds and bonds, may increase or decrease over varying periods.
Juan Ocanas may only transact business, follow-up with individualized responses, or render personalized investment advice for compensation, in states where he is registered or excluded or exempted from registration, https://advisor.morganstanley.com/the-calleja-group
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