As we are approaching the end of the tax year, you may start seeing some capital gains distributed by some of the investments you hold-mainly mutual funds. These distributions, if held in taxable accounts, have tax implications. You do not have control over capital gains distributions from your investment. Did you know that most mutual funds have an estimate of what your gains will be and when they will be paid around October? If you have a large position in a mutual fund, you should find out from the company what their estimates are so that you can do some planning around this potentially large capital gains tax.
The first step is to see if you have any carry-forward losses from your tax return that could potentially offset any gains. Remember, you can only use $3,000 of capital losses to offset your income. The remaining losses that are not used to offset other capital gains can be carried forward to future tax years. The next step is to look at your taxable accounts and the realized gains and losses you have for the year to see if there is a big impact to your tax situation. Once you have estimates of any capital gains distributions that could be paid out, you can then look at your investments to see if there are any changes you would like to make to your investment strategy that could positively impact your tax situation.
Capital gains are netted against each other first to get to your final gain or loss. Short term capital gains (less than one year) are taxed at your ordinary income rate. Long term capital gains are taxed more favorably than ordinary income rates. If you have large capital gains, they could push you into a higher capital gains bracket. Be on the lookout for any capital gains distributions in your taxable accounts this tax year so that you are not surprised when you prepare your income taxes in the spring.
Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.