tax savings

A Simple Technique for Reducing Future Taxes

by Joe Ben Combs, CPA

Tax Manager at Atchley & Associates, LLP

 

If you’ve ever done any sort of investment planning you’re probably familiar with the concept of tax loss harvesting. This is the practice of selling an investment that has decreased in value and purchasing a comparable investment, triggering capital losses which can be deducted against your other income. (There are a number of associated tax and non-tax issues that we will not address in this article so please consult a financial advisor or tax professional. before executing on this strategy.)

While tax loss harvesting is a great tax-saving move for a lot of people, the exact opposite can be even more beneficial for some and is far less often discussed. Tax gain harvesting is the practice of selling appreciated securities and immediately repurchasing the same or similar securities. Now instead of triggering capital losses you have created potentially taxable gains. So why would you do this?

Long term capital gains (gains on the sale of capital assets held for more than a year) are taxed at reduced rates. For people in most tax brackets this means a rate of 15%. However, if you are in the 10% or 15% tax brackets, qualified dividends and long term capital gains are taxed at 0%!

That’s no tax.

So how does this help you? Why is this beneficial when I could just as easily avoid tax by not selling anything? The benefit is not in the selling but in the repurchasing. By purchasing the same assets at a higher price you are now holding the same investment as before but you have increased your cost basis, thereby reducing future gains. All without any current tax cost. While it won’t save you any tax dollars today, your future self will thank you!

So now that we’ve covered the fun part – there are a few things to watch out for.

  1. First and foremost, the preferential rates only apply to assets held for more than one year. If you are selling shares of a security that you have purchased at various dates, make sure to select lots with the requisite holding period.
  2. While the wash sale rule that applies to loss harvesting (aimed at discouraging the repurchase of a security within 30 days of sale) does not apply to gain harvesting, some mutual funds will not allow an investor who has sold out of the fund to buy back in before a certain time period has passed. You will want to review any potential reinvestment restrictions applicable to the assets you intend to sell so that you can plan accordingly.
  3. Beware of state income taxes. Depending on where you live that 0% rate may not apply and state income taxes may cut into the benefit of the increase in basis. If you’re here in Texas that won’t be an issue but if you live in a state that taxes capital gains it may be something to consider.
  4. While a capital gain itself may avoid taxation, it still increases your adjusted gross income (AGI), which can affect the calculation of a number of credits and deductions. On top of this the additional income may increase the amount of Social Security benefits subject to tax.
  5. If you already have realized losses for the year it may defeat the purpose of harvesting gains, depending on the situation. This is certainly something to discuss with an advisor.

There are a number of other planning considerations that we don’t have time to discuss here but needless to say, we highly recommend discussing this or any other tax planning strategy with a qualified advisor.

Take small-business tax credits where credits are due

Tax credits reduce tax liability dollar-for-dollar, making them particularly valuable. Two available credits are especially for small businesses that provide certain employee benefits. And one of them might not be available after 2017.
1. Small-business health care credit
The Affordable Care Act (ACA) offers a credit to certain small employers that provide employees with health coverage. The maximum credit is 50% of group health coverage premiums paid by the employer, provided it contributes at least 50% of the total premium or of a benchmark premium.
For 2016, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of $25,000 or less per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $52,000.
To qualify for the credit, online enrollment in the Small Business Health Options Program (SHOP) generally is required. In addition, the credit can be claimed for only two years, and they must be consecutive. (Credits claimed before 2014 don’t count, however.)
If you meet the eligibility requirements but have been waiting to claim the credit until a future year when you think it might provide more savings, claiming the credit for 2016 may be a good idea. Why? It’s possible the credit will go away for 2018 because lawmakers in Washington are starting to take steps to repeal or replace the ACA.
Most likely any ACA repeal or replacement wouldn’t go into effect until 2018 (or possibly later). So if you claim the credit for 2016, you may also be able to claim it on your 2017 return next year (provided you again meet the eligibility requirements). That way, you could take full advantage of the credit while it’s available.
2. Retirement plan credit 
Small employers (generally those with 100 or fewer employees) that create a retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of qualified start-up costs.
Of course, you generally can deduct contributions you make to your employees’ accounts under the plan. And your employees enjoy the benefit of tax-advantaged retirement saving.
If you didn’t create a retirement plan in 2016, it might not be too late. Simplified Employee Pensions (SEPs) can be set up as late as the due date of your tax return, including extensions.
Maximize tax savings
Be aware that additional rules apply beyond what we’ve discussed here. We can help you determine whether you’re eligible for these credits. We can also advise you on what other credits you might be eligible for when you file your 2016 return so that you can maximize your tax savings.
© 2017