As we approach the end of the year and wrap up our end of the year planning for 2022, we are working with many on tax planning for 2023. As we worked with and helped many clients this year, a large area we saw many gaps and holes in was the tax planning area. Many individuals we worked with did not and do not fully comprehend their tax liabilities, including implications of capital gains and how to maximize losses. We want to take this opportunity where we saw lack of knowledge to discuss not only the importance of timely tax planning, but the importance of understanding your tax liability and implications.
First, in recent years with the influx of DIY traders, we’ve found that many individuals are unaware of the tax implications of capital gains and trading in the stock market. We know that it’s common to lack tax knowledge as many of these DIY platforms do not educate on capital gains and wash sale rules. In years prior during the short squeeze stocks and bitcoin craze, people were seeing enormous gains in the market, yet did not know what to do with the gains once they made them, resulting in large tax hits.
Fast forward to this year, an extremely volatile and uncertain year in the economy and stock market, many have seen great losses in their investment accounts, and are unaware of the ways they can actually use their losses to their advantage. Capital losses that exceed capital gains in a tax year can be utilized to offset ordinary taxable income up to $3,000 in any one tax year. Additionally, net capital losses in excess of that $3,000 can be carried forward indefinitely until the amount is used up, which is great for many to know in a years of volatility, such as the current.
Another tax mistake we see many make is not planning early or efficiently, causing them to file late and take on a penalty. Many individuals ignore their quarterly tax bills or file late and incur penalties and fines that are easily avoidable. We know taxes can seem daunting and overwhelming, which is why it can be a great idea to work with a CPA on your personal situation, as well as a financial advisor to work in conjunction tax professional.
As you can see, there is such a large gap in financial literacy in this country, especially surrounding the implications of taxes. At Sherman Wealth, we emphasize tax efficiency and think that after-tax return is so important. If you have any questions about how to make smart tax-efficient moves or what your tax implications are, let us know and we are happy to help. It’s important to fully understand the implications of your decisions and how they will affect all aspects of your portfolio. If you have any questions, please reach out to us at info@shermanwealth.com or schedule a 30-minute complimentary appointment here.
