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Year-End Tax Planning Strategies

Updated: Dec 5, 2023

By Michael K. Mooney Jr. MBA, CFP, Financial Advisor

As we approach the end of the year and celebrate the holidays with our loved ones, it may not seem like the best time to worry about our tax bill due next April. However, this is an important time to look back on the year from a tax standpoint to see where we stand and whether any changes need to be made by December 31st. In terms of your investment portfolio, certain transactions that you make between now and then can impact your tax bill. The goal of this article is to address those and gain a better understanding of how your investments are taxed.

For taxable or non-retirement brokerage accounts, including Individual Accounts, Joint Accounts, and Trust Accounts, the accounts are taxed on gains (or losses) of each position within the calendar year. For instance, if you buy Stock ABC for $1,000 and sell it during this year for $1,200, you are NOT taxed on the $1,000 initial purchase (the principal); you are only taxed on the $200 gain. The rate at which you are taxed depends on two things – the holding period and your tax bracket. If you hold a position for less than a year, it is taxed as ordinary income; if you hold a position for more than a year, it is taxed at capital gains rates. Capital Gains tax rates range from 0-20% and are lower than Ordinary Income tax (ranging from 0-37%) rates. Thus, there is a tax benefit to holding onto a position longer if it has gains.

As you know, not all investments work out in our favor! Due to the nature of investing, you may have a few positions within your portfolio that have an unrealized loss – that are worth less now than what you bought them at. While this is always unfortunate, it is part of investing. However, you can use these holdings to your advantage from a tax standpoint to help bring down your tax bill.

Just like selling a position with a gain will increase your taxes, selling a position at a loss will help to lower it. There is one caveat – you can only recognize up to a $3,000 loss to offset other income that you may have. Thus, if you made $50,000 of W-2 Income and have $5,000 of investment losses from your investment accounts, you can only use $3,000 of those losses to offset your W-2 income on your taxes for this year. The remaining $2,000 loss will carry forward to future years. It is the job of you and your accountant to make sure to remember this when filing your taxes next year (and possibly beyond).

Should you go ahead and sell every position with a loss right now? Possibly, but not necessarily! This is something that you and your Financial Advisor should discuss. There are a number of factors that will determine this, including:

  1. The Investment: If the position in question is an investment that you or we no longer want to own anyways, then it makes the decision easier. However, it could also still be a great investment that possibly just has a loss and is not worth selling at the current price point.

  2. Current YTD Realized Gains/Losses: If you already have reached the $3,000 carry over limit for the year, there is likely less of an urgency to take more losses for the year.

  3. If the loss will make a material impact on your tax bill: If you hold a position at a $5 loss and you have a $20,000 tax bill, obviously it will not have much of an impact on lowering your tax bill.

  4. Tax Lots/Versus Purchase: A position you own may have an overall gain, but the individual share lots (purchased at different times) could have a loss. For instance, if you hold 10 shares of Stock XYZ that you bought in 2015 (with an unrealized gain) and another 5 shares that you bought in 2021 that have an unrealized loss, you can choose to sell ONLY the one lot with a loss to capture that.

One more item to keep in mind is the topic of Wash Sales. Should you decide to sell one of your investments at a loss, you must wait at least 30 days to buy it back in the account (or any of your accounts, including retirement accounts) should you choose to do so. Otherwise, the sale will be considered a “Wash Sale” and the loss will not be recognized. However, there are always ways around this as well – you can choose to buy a competing company or sector ETF as an alternative in the meantime to avoid this situation. The reason why you would want to do this would be to remain fully invested in your account and hedge in case that position has a great month during the time that you do not own it anymore.

Please reach out to your Financial Advisor to discuss further, to review your portfolio from a tax standpoint, or with any questions.

Wells Fargo Advisors Financial Network is not a legal or tax advisor. Any discussion of taxes represents general information and is not intended to be, nor should it be construed to be, legal or tax advice. Tax laws or regulations are subject to change at any time and can have a substantial impact on an actual client situation.

CAR: 1122-03681


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