2015 Year-End Investment Tax Planning


There is one certain way to avoid owing tax on capital gains: Don’t sell any investments at a profit. At least, wait until January to take gains, postponing any tax obligation for a year.

Moreover, there’s an argument for staying the course with your stock market holdings. Historically, investors following a “buy and hold” strategy often have outperformed those who tried to move in and out of the stock market.  Timing the market has been difficult, if not impossible, and that probably will be the case in the future.

In 2015, the broad U.S. stock market is more than 10% higher than it was at the 2008 peak, before the financial crisis drove down share prices. Investors who held on are ahead of where they were, and have collected seven years of (probably low-taxed) stock dividends in the interim.  They have avoided paying tax on realized gains as well.

What’s more, investors who truly maintained their strategy reaped another benefit. In late 2008 and in the following years, stocks were “on sale,” as it turned out, selling at what proved to be low prices.  Regular investing paid off, without a tax bill from taking gains.

Risk reduction 

Staying the course and investing through turmoil sounds like a good way to survive a steep stock market reversal. In practice, though, that plan has flaws.  Many people aren’t emotionally equipped to hold onto assets that seem to be losing value, day after day, and to keep investing when stocks trade at lower prices.

Therefore, another tax-efficient way to lower your stock market exposure is to put future investment dollars into cash, bonds, or other asset classes.

The 0% Solution 

Instead of implementing a buy and hold strategy, you might sell equities to reduce stock market exposure. However, profitable sales in a taxable account are likely to lead to a tax bill.  Indeed, if you are working and earning a substantial income, you might owe 20% on any long-term capital gains, not the basic 15% tax rate.  You also could owe the 3.8% Medicare surtax, depending on the amount of income reported for 2015.

For people in the 10% and 15% tax brackets, long-term capital gains are taxed at a 0% rate. As a result, you can sell enough stocks to cause a $12,000 gain in 2015, and not pay income tax on the long-term gains.

This strategy can work well for retired couples because the 15% tax bracket for a joint return goes up to $74,900 in taxable income this year. Married seniors might take enough long-term stock gains by year-end 2015 to fully fill up that tax bracket.  Those gains will not be taxed, and the sellers can reinvest the proceeds elsewhere, if they want to trim stock market risk. 

Gain from losses

Although taking gains in a taxable account may trigger income tax liabilities, recognizing losses in these accounts can be beneficial. Energy stocks and funds have posted losses this year, and the same is true of precious metals securities.  With the overall market barely ahead for the year, many individual issues have lost value.

By taking losses this year in a taxable account, you create an opportunity to take an equal amount of gains there, untaxed. If desired, you can reinvest the proceeds in other asset classes or put them in the bank, to reduce reliance on stocks.

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