Tax Season Tips for Managing Capital Gains, Losses and Dividends

Jarrett E. Hindrew, CFP®, ChFC®, CLU®, Financial Advisor
Creative Financial Group, a Division of Synovus Securities, Inc.

During tax season, clients often have questions about managing capital gains, losses and dividends to optimize their after-tax returns. Here are some key points to consider:

• Capital Gains: A capital gain or loss results from the sale of a capital asset (e.g., stock, bonds, mutual funds, real estate, etc.). The net sales proceeds minus the adjusted cost basis determines the capital gain or loss.


• Long-Term Versus Short-Term Gains

The holding period begins on the day following the acquisition date. Holding periods exceeding one year qualify as long-term gains, entitling them to preferential tax rates. Conversely, short-term gains apply to assets held for a year or less, taxed at marginal rates. Long-term capital gains and qualified dividends typically fall into three tax brackets: 0%, 15%, or 20%.

Under current law, the current brackets are as follows:

Understanding these distinctions is vital for determining tax rates on capital gains and optimizing tax efficiency in investment decisions.

Special Holding-Period Rules for Gifts and Inherited Assets

Gifted Assets: The holding period for an appreciated asset received as a gift combines the time you've held the asset with the donor's holding period.

Inherited Assets: Property inherited due to a death in years other than 2010 automatically qualifies for a long-term holding period, regardless of the duration you or the deceased held the asset.

For assets inherited from deaths in 2010, the basis and holding period rules are intricate. It's advisable to consult with your tax or legal advisor to understand the specific treatment of each inherited security.

Short-Term Capital Gains and Nonqualified Dividends

Short-term capital gains and nonqualified dividends are taxed at an individual's marginal tax rate, reaching a maximum of 37%.

Qualified Dividends

Qualified dividends are distributed by U.S. corporations or entities in U.S. possessions to preferred or common shareholders.

Mutual funds and regulated investment companies can pass through qualified or nonqualified dividends based on underlying securities.

Distributions from partnerships, real estate investment trusts (REITs), and preferred debt are typically not considered qualified dividends.

Dividend Holding Period Requirement

Common Stock: Shareholders must own common stock for more than a 60-day period around the ex-dividend date to qualify for special tax treatment.

Preferred Stock: Owners of preferred stock must hold shares for more than a 90-day period, including the ex-dividend date, to benefit from qualified dividend tax treatment.

Offsetting Capital Gains and Losses

Offset short-term and long-term capital gains against respective losses, combining net results. Any remaining net capital loss (up to $3,000) can offset ordinary income in the current tax year.

Capital Loss Carryover

Unused net capital losses can be carried forward until fully utilized or the taxpayer's death, with specific rules for carryover losses in final income tax returns. Losses carried over maintain their long-term or short-term character in subsequent years.

Note: When calculating the Medicare surtax, the $3,000 capital loss cannot offset dividend income.

Wash Sale Rules and Strategies

A wash sale occurs if you sell stocks at a loss and repurchase the same or substantially identical securities within 30 days before or after the sale.

The IRS disallows the loss, preventing you from claiming the deduction. Instead, the disallowed loss is added to the cost basis of the newly purchased security within the wash sale period.

Adjusted Cost Basis and Holding Period

The disallowed loss increases the cost basis of the new security, potentially affecting future capital gains or losses upon its sale. The holding period for the new shares includes the original shares, impacting the determination of long-term or short-term gains.

Strategy to Avoid Wash Sale

One strategy to avoid a wash sale is to increase your position in a security at least 31 days before selling the original position at a loss. This strategy avoids the wash sale rule by maintaining the initial position while establishing a new one.

Another is to consider selling a stock and purchasing an exchange-traded fund that targets that same sector.

Wash sale rules are intricate and can have significant implications on taxes and investment decisions. Work closely with financial professionals and tax advisors to navigate these rules effectively and optimize your investment strategies.

Overview of Medicare Surtax on Net Investment Income

Higher income taxpayers may face an additional Medicare tax of 3.8% on net investment income, which includes interest, dividends, capital gains, rental and royalty income, and certain passive activities. Taxpayers with modified adjusted gross income surpassing $200,000 for single individuals and $250,000 for married couples filing jointly are subject to this surtax.

Note that this is separate from the Additional Medicare Tax, which also went into effect on January 1, 2013. It is possible to be subject to both taxes, but not on the same type of income. The 0.9 percent Additional Medicare Tax applies to individuals’ wages, compensation and self-employment income over certain thresholds, but it does not apply to income items included in Net Investment Income.

By understanding these tax implications, implementing offsetting strategies, and seeking guidance from tax and financial professionals, clients can navigate complex tax rules, preserve investment positions, and enhance after-tax returns. Effective tax planning, tailored to individual circumstances and goals, is essential for long-term financial success.