2024 Year-End Tax Strategies for Your Stock Portfolio

As 2024 comes to a close, it’s crucial to review your stock portfolio to implement strategies that minimize taxes. By making some strategic moves, you can avoid paying high taxes on short-term capital gains and lower the tax rate on your gains, potentially reducing it to 23.8% or even 0%. Here are seven strategies to maximize your tax savings and optimize your portfolio before the year ends.

Key Tax Rules You Need to Know:

Before diving into strategies, it’s important to understand the tax rules that govern your stock portfolio:

1. Short-term capital gains and ordinary income are taxed up to 40.8%, which includes the 37% top income tax rate plus the 3.8% Net Investment Income Tax (NIIT).
2. Long-term capital gains are taxed at rates ranging from 0% to 23.8%, depending on your income.
3. Stock dividends are taxed at rates between 0% and 23.8%, depending on your income.
4. Capital loss limitations: You can offset your capital gains with capital losses, but losses over $3,000 can be carried over to future years.
5. Loss order: The IRS allows you first to offset long-term gains with long-term losses, then offset short-term gains with short-term losses.
6. Charitable donations: Donating appreciated stock allows you to deduct the fair market value, and donating depreciated stock allows you to deduct the fair market value of the loss.
7. Taxable losses: Donating depreciated stocks doesn’t allow you to claim a loss. You need to sell the stock before donating to claim a loss.

Seven Tax-Saving Strategies:

1. Offset Gains and Losses: To avoid paying the higher tax rate of 40.8% on short-term capital gains, consider selling stocks with long-term losses. Offset the high taxes on short-term gains using long-term losses, effectively reducing your tax liability.
2. Use Long-Term Losses to Offset Ordinary Income: If you have long-term losses, you can use them to offset up to $3,000 of ordinary income. This strategy can help eliminate taxes on income taxed at a higher rate. For example, use a 23.8% loss to offset a 40.8% tax on short-term gains.
3. Avoid the Wash-Sale Rule: The wash-sale rule prevents you from recognizing a loss if you buy the same or substantially identical stock within 30 days before or after selling it. If you sell a stock at a loss and wish to claim that loss in 2024, make sure to wait more than 30 days before repurchasing it.
4. Don’t Die with Loss Carryovers: Capital loss carryovers from previous years can offset future gains. However, if you die with these losses, they may be lost unless your surviving spouse can carry over the losses. To avoid losing these valuable carryovers, sell stocks or assets before the year ends to realize any losses.
5. Leverage Lower Tax Brackets: If you have family members in a lower tax bracket, consider gifting appreciated stocks to them. When they sell the stocks, they will pay taxes at their lower rates, which could be significantly less than your rate. For example, if your parents or children are in a lower tax bracket, they will pay less tax on dividends or capital gains than you would.
6. Donate Appreciated Stock to Charity: One of the best ways to maximize tax savings is by donating appreciated stock to charity. By donating appreciated stock directly to a 501(c)(3) organization, you can:
   • Deduct the full fair market value of the stock as a charitable contribution.
   • Avoid paying taxes on the appreciation, which could be significant. For example, if you bought stock for $1,000 and it’s now worth $11,000, you could deduct $11,000 without paying taxes on the $10,000 profit.
     
     Remember, however, that your charitable donation deductions are capped at 30% of your adjusted gross income (AGI) if you donate appreciated stocks. Any excess can be carried forward for up to five years.
7. Avoid Donating Stock with Losses: If you have stock that has decreased in value, selling the stock to realize the loss gives you a tax deduction. Donating depreciated stock directly to charity will not allow you to claim the loss. Instead, sell the stock, claim the tax-deductible loss, and then donate the cash to the charity. This way, you can maximize your charitable contribution and offset your taxable gains.

Takeaways

The strategies outlined in this article provide opportunities to reduce your taxable income and ultimately pay less in taxes. You can keep more money in your pocket by offsetting gains and losses, donating appreciated stock, and making the most of lower tax brackets. The key to success is planning. With a little planning, these tax strategies can provide substantial savings, so take action now to optimize your stock portfolio for the year-end.