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Baron Financial Answers Video: Why are my capital gains higher this year?

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Presented by Nicholas Scheibner, CFP®

View or listen to our video on capital gains and taxes

Nicholas Scheibner, CFP®, Wealth Management Advisor at Baron Financial Group, helps explain how capital gains affects your tax situation and how we aim to minimize taxes.

The question for today is “Why are my capital gains taxes higher this year than maybe I’m used to”. Maybe they aren’t higher for you, but for many people they may have been filing their taxes and noticed that their capital gains are a little bit higher than in previous years and they are trying to understand why that might be. 

We're going to discuss:

  • Different types of taxes
  • Why are capital gains taxes realized throughout the year?
  • What is the difference between income tax and capital gains?
  • How can we aim to minimize taxes?

When are we taxed?

  • Income is Earned:  Taxes are assessed on a progressive scale during the year they are received.
  • Profits are Realized: Taxes are levied when you sell an investment for more than you purchased it for.
  • Point of Sale: A percentage of the sale price added to the final receipt of a purchase.
  • Wealth is Transferred: After exclusion amounts, gifts or inheritances can be subject to state and/or federal tax.

The bottom line - if you are taxed, you made money!

Why are Capital Gains Realized?

  • Withdrawal Needs: If you need to make a withdrawal from your investments, those investments may need to be sold and  cash generated to initiate that transfer. 
  • Rebalancing: If your current strategy is not aligned with your target strategy, there could be some buying and selling in your strategy to get you back to target.
  • Risk Reduction: If you have a concentrated position, we may need to reduce that position to decrease your overall risk levels. 

Capital Gains Taxes vs Income Taxes

One thing to remember when comparing capital gains taxes and income taxes is that in our current federal tax system, capital gains receive preferential tax treatment over income taxes.  

How we aim to minimize taxes?

  • Tax-Loss Harvesting:  Offset gains with losses for the year.
  • Charitable Giving Strategies:  Gifting appreciated stock to a charity can reduce capital gains. 
  • Cash Cushions:  When withdrawals are recurring, we may build a cash cushion to help manage taxes.
  • Asset Location:  We may aim to have higher taxable investments inside of tax-deferred accounts.

Our goal is not to create taxes, but taxes are often inevitable when investing.  We do look at ways to minimize taxes throughout the year, while also balancing the overall risk level of your portfolio.

Please contact the Baron Team with any questions or if you would like a free second opinion on your portfolio.

Look for our next question in the Baron Financial Answers Video Series.
You can view all of our videos in the series here.

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Disclosure: This is a general communication being provided for informational purposes only.  Every investment strategy has the potential for profit or loss. This material is not intended to be relied upon as a forecast, research, tax or investment advice. Please consult your financial planning and tax professional for personal advice.