Some investors may be feeling the sting of higher-than- expected capital gains and losses. Tax-planning opportunities may be able to help.
The surge in capital gains in 2021, according to the Penn Wharton Budget Model, may be to blame for individuals paying more taxes this season.
The report shows that filers paid more than half a trillion dollars in April 2022, adjusted for inflation, compared to previous years. In May 2021, payments fell below $250 billion.
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Capital gains, dividends and interest are included in these payments, along with levies paid by so-called pass-through businesses, with profits flowing to owners.
Alex Arnon, an associate director of policy analysis for the Penn Wharton Budget Model, said that it was a striking increase.
The Treasury reported a $308 billion surplus for April, a monthly record, with receipts hitting $864 billion, which more than doubled the previous year's amount.
There was a $226 billion deficit in April of 2021.
Line chart with 251 data points.The chart has 1 X axis displaying Time. Range: 2021-01-04 01:00:00 to 2021-12-30 01:00:00.The chart has 1 Y axis displaying values. Range: 3500 to 5000.End of interactive chart.
It is possible that investors with mutual funds in taxable accounts have seen larger-than- expected year-end distributions.
Higher volumes of trading over the past few years may have contributed to higher capital gains in 2021.
Some advisors may be considering tax opportunities after seeing gains and losses.
Karl Frank, president of A&I Financial Services in Colorado, said that last year's tax gains were brutal.
Tax-loss harvesting is when losing assets are sold to offset future gains. You can reduce regular income taxes if losses exceed gains for the year.
Don’t let the tax tail wag the investment dog.
Before making purchases, check how much income assets create. Frank said that exchange-traded funds tend to be more tax efficient than actively managed mutual funds.
Since tax-free and tax-deferred accounts shield investors from current-year capital gains, asset location is important.
Frank warns not to let the tax tail wag the investment dog. When choosing assets and accounts, it is important to consider your entire financial plan.
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