Question

3. Matt has a substantial portfolio of securities. As of December 2 of the current year, Matt has a net capital gain position of $22,000. Discuss Matt's optimal tax-planning strategy for capital gains and losses.

Answer 1

Matt's optimal Tax-planning strategy for capital gain or losses:

1. The 10%–15% Tax Bracket

For people in the 10% or 12% income tax bracket, the long-term capital gains rate is 0%. Under the Tax Cuts & Jobs Act, which took effect in 2018, eligibility for the 0% capital gains rate is not a perfect match with the income ceiling for the 12% income tax rate. The income thresholds for the 0% rate are indexed for inflation:

• in 2019, $39,375 (single filers) and $78,750 (joint filers)
• in 2020, $40,000 (single filers) and $80,000 (joint filers)

Before matt believe he qualifies for this special 0% capital gains rates, he want to be sure that he doesn’t trip over the tax rules.

2. Using Tax Losses

Capital losses of any size can be used to offset capital gains on matt's tax return to determine his net gain or loss for tax purposes. This could result in no capital gains at all to tax. Called tax-loss harvesting, this is a popular strategy. While only $3,000 of net capital losses can be deducted in any one year against ordinary income on your tax return, the remaining balance can be carried over to future years indefinitely.

3. Stock Donations

Instead of selling the appreciated stock, paying the capital gains tax, and then donating the cash proceeds, just donate the stock directly. That avoids the capital gains tax completely. Plus, it generates a bigger tax deduction for the full market value of donated shares held more than one year, and it results in a larger donation.

4. Qualified Small Business Stock

Private company shares held for at least five years that are considered qualified small-business stock (QSB) may be eligible for an income exclusion of up to $10 million or 10 times their cost basis. This is separate from the approach of rolling over his capital gains by reinvesting them within 60 days of sale in another startup. For the stock to qualify, the company must not have gross assets valued at over $50 million when it issued you the shares.

5. The standard calculation for capital gains in a retail brokerage account after commissions and fees is:

capital gains = sale proceeds – cost basis (purchase price of stock)

Yet when matt dies before selling or gifting, this cost basis in most situations is “stepped up” to the fair market value on the date of death. The stock escapes the capital gains tax on the price increase during your lifetime, regardless of the size of your estate. Thus, no taxable gain is recognized when the inherited shares get sold at no higher than the death-date price.

These are some of the tax planning strategy for Matt's capital gain and losses.