Capital gains taxes might sound like a complex financial term reserved for Wall Street tycoons, but in reality, they touch most investors and many homeowners. Whether you're selling stocks, a piece of real estate, or that vintage baseball card collection, understanding capital gains taxes can help you make smarter decisions and keep more money in your pocket.
At its core, a capital gain is the profit made from the sale of an investment or real estate. If you buy an asset for $1,000 and later sell it for $1,500, you have a capital gain of $500.
These gains are categorized in two ways:
Why does this distinction between short-term and long-term matter? Because the tax implications can be substantial. For many taxpayers, long-term capital gains are taxed at a more favorable rate than short-term gains. Thus, holding onto an asset for just a bit longer (say, 13 months instead of 11) could lead to a significantly lower tax bill.
A bit of advice from a financial advisor highlights a vital perspective: Always look at the net profit (after taxes) when considering a sale. This underscores the importance of tax planning as an integral part of investment strategy.
There are specific cases where the capital gains tax has exemptions or special rules. A notable example is the sale of your primary residence. If you meet certain requirements, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of gains from taxes. However, this doesn't apply to rental or second properties.
Wait it Out: As mentioned, holding onto investments for more than a year moves them into the long-term category, often resulting in lower taxes.
Tax-Loss Harvesting: This involves selling securities at a loss to offset capital gains in other areas. It can be a strategic move, especially in a down market.
Gift Assets: Instead of selling assets, consider gifting them. While there are limits, this can be a way to transfer value without triggering capital gains taxes.
Maximize Tax-Advantaged Accounts: Utilize accounts like 401(k)s or IRAs, where investments grow tax-free or tax-deferred.
Stay Updated: Tax laws can change. Ensure you're up-to-date with the latest rules and rates.
While taxes are inevitable, the weight of their impact is, to an extent, under your control. By understanding the nuances of capital gains taxes and making informed decisions, you can optimize your financial outcomes.
Remember, it's not just about what you make, but also what you keep. A proactive approach today can lead to fruitful savings tomorrow.
When should you file your income tax? Generally speaking, the earlier, the better, after January 1st if you expect to get a refund. If you file by the end of February, you should receive your check within six weeks. But, if you delay and file in April when the Internal Revenue Service is inundated by forms from other last minute taxpayers, you could face a long wait for your refund.
If you are in line for a refund, avoid congratulating yourself too enthusiastically. That only means you have given the government free use of money that was rightfully yours. If you want to put those extra dollars to work for you instead of Uncle Sam, simply reduce the amount withheld from your paycheck. You do that by completing a W-4 Form and increasing your number of allowances on it.
If you have the money to pay but just cannot complete your tax return by the April 15th deadline, the IRS will extend your day of filing to October 15th (for this year, the deadline is actually April 18th and October 16th). You must, however, send in an extension form – IRS Form 4868 – and an estimated payment of your taxes by April 18th. Here’s the important thing to remember: the IRS automatically grants an extension to anyone who fills out the form correctly. They don't even ask you why because it doesn’t matter to them
You or your accountant can estimate your income for last year and subtract any deductions and credits you expect to take. Then, by referring to the tax tables in the 1040 instruction booklet, you estimate the amount you owe.
If you underestimate the income tax due, you may have to pay a penalty on your outstanding balance. But, if you send in your return late without having filed for an extension, the IRS will be much less forgiving.
Here is another matter to watch: Even if you file an extension form, you must still make your past year's contribution to your Individual Retirement Account by April 18th.
If you have omitted information, or would like to add information to your tax return after you have filed it, you may prepare amended federal and state returns. Generally, the IRS allows up to three years from the original filing date to amend a return.
According to the IRS, almost one out of fourpeople who owe the government taxes on April 18th cannot pay. What should you do when you discover that you owe the government more than you can possibly pay by the due date?
Experts advise that you should file your tax return on time and send in as much as you can, otherwise you will be faced with paying larger penalties.
First, you might be liable for a fine based on your tax liability each month for late filing. Second, you may be charged annual interest compounded daily. You can generally avoid tax fines by filing a timely extension and paying at least 90 percent of your total tax liability. You still will have to pay interest on any balance due.
The IRS has a number of options available if payment is not made. They can attach your paycheck and seize your bank accounts and home, but they almost never take such drastic action if you earnestly try to pay your debts.
The key is communication. If you do not enclose a check when filing your return, you will eventually receive a letter demanding payment within ten days. The best advice here is: do not ignore this notice: The IRS becomes tougher with every passing day.
Just be sure to telephone or visit the IRS office listed on the delinquency notice. Do that immediately after receiving the first notice instead of waiting for the fourth and final one about three months later. It is wise when meeting with the IRS to take along a professional tax advisor. An advisor often has the ability to get the IRS to agree to better terms than you can.
Once you have finalized your arrangements with the IRS, make a point of preventing it from happening again. If you are a wage-earner, take fewer withholding allowances at work so more money for taxes will be deducted from your pay; if you are self-employed, increase your quarterly estimated tax payments.
As the old saying goes, "the only two sure things in life are death and taxes."
As you enter the workforce and start to earn a regular income, it's easy to get carried away with newfound financial freedom. However, this can often lead to costly money mistakes that can have long-lasting consequences.
Here are some common money mistakes that young professionals often commit.
One of the most common money mistakes is overspending and living beyond your means. With a newfound income, it's tempting to indulge in luxury purchases or expensive nights out. However, this can quickly lead to accumulating debt and financial stress. It's important to create a budget and stick to it, limiting your expenses to what you can afford.
Many overlook the importance of building an emergency fund. Unexpected expenses such as car repairs, medical bills, or job loss can quickly drain a bank account, leaving you in a precarious financial situation. It's recommended to have at least 3-6 months' worth of living expenses saved in an emergency fund to provide a cushion during tough times.
Retirement may seem far off, but it’s important to start investing early to take advantage of compound interest. Failing to invest in retirement can result in having to work much longer than expected or struggling to make ends meet in later years.
Student loans, credit card debt, and other loans can accumulate quickly, and ignoring debt repayment can lead to long-term financial struggles. It's important to prioritize debt repayment and pay off high-interest debt as soon as possible to avoid accumulating interest and penalties.
Many may overlook the importance of protecting their assets, such as their income, health, and property. It’s essential to have insurance coverage to protect against unexpected events such as illness, disability, or property damage.
You may be tempted to jump on investment opportunities without fully understanding the risks involved. It's important to research and understand investment options before committing any money to them.
Many may be hesitant to negotiate their starting salary, but failing to do so can result in leaving money on the table. It's important to research industry standards and come prepared to negotiate a fair salary.
We all need to be mindful of our finances and avoid common money mistakes that can have long-term consequences. By being proactive and careful with your finances, you can set yourself up for a secure financial future.
In today’s business climate, it may be more important than ever for companies to operate at maximum efficiency and with a keen awareness of the potential impact of changes in their industry and the economy. Using a SWOT analysis to take a closer look at your company’s internal operations, as well as its position in the marketplace, may help you avoid costly mistakes, improve your management practices, and refine your long-term strategic goals.
The acronym SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis is a strategic planning tool designed to assist an organization in identifying the internal and external factors likely to affect its ability to achieve its objectives. It can also be used to help management formulate ways to enhance processes and prepare for potential challenges. While some businesses regularly conduct these assessments, a SWOT analysis can be especially helpful prior to making a major strategic decision.
To conduct a SWOT analysis, start by evaluating where your company currently stands in each of the four categories.
Under the heading “strengths,” list the areas where your business currently performs exceptionally well or possesses certain competitive advantages. Your company may, for example, have experienced and committed employees, a long history in the community, or products and services that have been shown to be effective. Under the heading “weaknesses,” make a list of areas where your company could show improvement. These weaknesses may include, for example, cash flow problems, high levels of debt, a key employee who is about to retire, or inefficient and aging IT systems.
If you have trouble developing an objective assessment of your strengths and weaknesses, imagine that you are viewing your business from a variety of perspectives, such as that of a client, a vendor, a staff member, or an investor. The comments you have received from others about your business can help you to determine more accurately the areas in which your group excels, as well as those in which improvement is needed.
Next, take stock of the external environment by evaluating potential opportunities and threats. When compiling a list of “opportunities,” think about the possibilities, both large and small, for expanding your offerings or creating new funding streams. These may include, for example, partnering with another business, adding new products, or intensifying marketing efforts in a new target demographic. Under the heading “threats,” list all of the outside influences that could prove detrimental, such as downturns in the economy, shifts in client demand, changes in the legal or political landscape, or natural disasters.
After compiling your own SWOT list, convene a meeting of members of your management team, professional advisors, and a representative group of employees. When discussing strengths and weaknesses, focus especially on where your company stands in each of these areas relative to competitors, the company’s capacity to grow and to take on new challenges, and how your company’s strengths and weaknesses make it more vulnerable—or more resilient—in the face of outside threats.
Once you and your team have compiled a thorough SWOT list, this information can be used by the company to streamline practices and formulate new strategies. A SWOT analysis can help your company build upon its current strengths, make plans to improve areas of weakness, and prepare to avert or cope with potential problems.
Besides helping you hone your strategy and strengthen your position in the marketplace, a SWOT analysis can be useful when approaching investors and in improving your relations with board members, employees, and other stakeholders. A thoughtfully prepared inventory of your assets and liabilities, coupled with a strategic plan to act on those findings, can serve as tangible evidence of your management skills and willingness to take the action necessary to ensure that your business continues to meet or exceed its goals.
As you evaluate the efficacy of your investments with an independent professional, it’s important to revisit two key principles—asset allocation and diversification. Any long-term investment plan will most likely have to weather market “ups” and “downs.” Softer markets often create opportunities for purchasing shares at lower prices, and through dollar cost averaging, you may be able to average a lower cost per share over time.
Maintaining a regular investment program and balancing your portfolio to account for a comfortable risk level are important to the overall success of your financial strategies.
The main objective of asset allocation is to match the investment characteristics of the various asset categories (equities, bonds, cash, etc.,) to the most important aspects of your personal investment profile—that is, your risk tolerance, your return and liquidity needs, and your time horizon. Asset categories generally react differently to economic fluctuations. Strong Valley financial advisors have the experience and specialized tools to help you analyze your individual risk tolerance.
If you have assembled an unplanned investment medley, you may be unaware of the extent to which your investments are (or are not) consistent with your objectives. Since various investment categories have unique characteristics, they rarely rise or fall at the same time. Consequently, combining different asset classes can help reduce risk and improve a portfolio’s overall return. While there is no set formula for asset allocation, guidelines can help you accomplish certain goals (for example, the need for growth in order to offset the erosion of purchasing power caused by inflation).
Diversification is an investment strategy used to manage risk for your overall portfolio, using techniques such as mixing your holdings to include a variety of stocks (small-cap, mid-cap, and large-cap), mutual funds, international investments, bonds (short- and long-term), and cash. By varying your investments, diversification attempts to minimize the effects a decline in a single holding may have on your entire portfolio.
To maintain a regular investment program, many investors make dollar cost averaging an integral part of their overall savings plan. Using this systematic investing technique, an investor buys more shares when prices are low, and fewer shares when prices are high. This may result in a lower average cost per share than if you were to purchase a constant number of shares at the same periodic intervals or make a single investment.
Dollar cost averaging cannot guarantee a profit or a lower cost per share, nor can it protect against a loss. However, it is a strategy that reinforces the discipline of regular investing and offers a systematic alternative to “market timing.” In order to take full advantage of dollar cost averaging, you need to consider your ability to continue purchases through periods of low price levels.
Periods of falling prices are a natural part of investing, as are strong market intervals. It is important to regularly review your portfolio with your financial advisor to help ensure your investing strategies remain aligned with your financial objectives.
You might also consider Strong Valley’s comprehensive wealth management services to craft a clear long-term vision and solution for managing every aspect of your financial life, freeing you to focus on living life to the fullest today and free from worry about tomorrow.
*Neither Asset Allocation nor Diversification guarantees a profit or protects against a loss.
Successful money management requires ongoing reviews. Each year, you should pull all your records together and take a close look at your entire financial picture. Here are six steps that can help you put your financial affairs in order so you can build a strong foundation:
In your budget, does your income equal or exceed the amount you put into savings and fixed or variable expenses? If it exceeds the amount, by how much? The amount of income that exceeds what you saved or spent is called positive cash flow. If your expenses exceed your income, you have negative cash flow. If your cash flow is negative, it may be time to reorganize and minimize any unnecessary expenses in your budget.
For every financial goal you establish, you need to address the projected cost, the amount of time until your goal is to be realized (time horizon), and your funding method (e.g., a scheduled savings plan, liquidating some assets, or taking a loan).
You should plan your goals on three tiers. On the first tier, you have an emergency fund of at least three months of income. On the second tier, you may have a special goal and may, for example, establish a savings plan for your children’s weddings or educational expenses. Finally, on the third tier are more flexible goals such as purchasing an automobile, renovating your house, and planning a vacation.
Are you going to have enough money when you retire? Pensions and Social Security may not provide enough income to maintain your current lifestyle during your retirement years. Therefore, review your retirement needs and plan a disciplined savings program for your retirement.
Many taxpayers reduce their taxes by taking advantage of tax deductions. Most are familiar with common deductions (e.g., mortgage interest, contributions to retirement plans, and donations to charities). In addition to tax deductions, however, there may be other ways of reducing your income tax bite. For example, under appropriate circumstances, losses or expenses from previous years may be carried over to the next tax year.
You are probably well aware that life sometimes throws us unexpected “curve balls”—that is, unforeseen risks. Suddenly and unexpectedly, your potential risk may become a financial loss (e.g., you become disabled without income or an untimely death causes financial hardship for your family). As a result, many have made insurance the cornerstone of their overall finances because it offers protection that can help cover unforeseen potential liabilities and risks.
These five steps will help you focus on the important issues that affect your finances. If you faithfully keep track of your progress in these important areas, you may be able to both afford your future and finance your dreams.
As Charles Dickens tells us in his celebrated Christmas fable*, the self-defeating ways we behave financially are rooted in the past. Digging them out is the best way to fix what’s wrong.
The first step in changing problematic financial behavior is to become open to admitting that improving how you act is important, and then seriously contemplating making the change. Ebenezer Scrooge in A Christmas Carol took that step when he heeded a warning from the ghost of Jacob Marley.
The next step in financial transformation is the most difficult and requires the most courage. It is revisiting the events in our lives where our strongly held delusions were formed. Scrooge initially resisted this step. Yet his guide, the Ghost of Christmas Past, gently turned him toward the past.
Looking clearly at entrenched financial delusions isn't easy. Many people want to focus instead on learning more about how to save, invest or spend wisely. Yet dwelling on present-day concerns, before visiting the past, is often ineffective.
What’s needed most for transformation is emotional intelligence, which you cannot learn academically or all by yourself. You learn the lessons emotionally, experientially, and in community. Just as Scrooge found a guide in the Ghost of Christmas Past, people wanting to gain emotional intelligence require the assistance of a financial coach or therapist. This is a journey you cannot take alone.
Once you take that difficult but transformational journey into the past, you can begin to see reality with new clarity. Once you gain emotional intelligence, you have the opportunity to replace faulty beliefs with accurate cognitive information. This is the time for learning about budgeting, debt reduction, investments and other financial skills.
Scrooge's guide, the Ghost of Christmas Present, helped him negotiate the current day and obtain this knowledge. Our real-world guides may include accountants, attorneys, financial planners, educational books and workshops.
When you gain accurate financial knowledge, you are ready to look toward the future to see where previous delusions potentially were taking you. Like the vision that the Ghost of Christmas Future unveils before Scrooge, the scene is often harsh. However, because of your preparation, you have the capacity and tools to enter the action phase.
Now you can begin to create a future that is consciously and deliberately planned. You can start to take control of your money rather than your money controlling you. Your guide can be your financial advisor.
Many try to shortcut the transformation process by starting with looking at the future. Sadly, without first taking the critical steps of viewing the past and learning the present, you often lose heart. This is why resolutions for financial change tend to fail, not because the goal is bad or unattainable, but because you are unprepared to go into action.
Giving the gift of a financial transformation is not possible. It is a gift that you can only receive. This Christmas and New Year, perhaps it's time for you to receive yours.
*refers to A Christmas Carol by Charles Dickens, 1843
Investment advice is offered through Integrated Partners, a registered investment adviser doing business as Strong Valley Wealth & Pension. This information on the website has not been approved or verified by the United State Securities and Exchange Commission or by any state securities authority. Registration as an Investment Adviser does not imply a certain level of skill or training. Strong Valley Wealth & Pension, LLC offers securities through M.S. Howells & Co. Member FINRA/SIPC. M.S. Howells is not affiliated with Strong Valley Wealth & Pension. Not all products and services referenced on this site are available in every state and through every representative or advisor. Check the background of the firm or investment professional on BROKER CHECK or ADVISER CHECK.
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