The United States Department of the Treasury building
Julia Schmalz Bloomberg | Getty Images
Some investors may be grappling with the sting of higher-than-expected capital gains for 2021 and losses in 2022. But experts say tax planning opportunities could mitigate the blow.
Individuals have paid far more taxes this season, and the increase in capital gains in 2021 could be the cause, according to to the analysis from the budget model Penn Wharton.
Adjusted for inflation, filers paid more than $ 500 billion in April 2022, up from $ 300 billion in the years before the pandemic, based on data from the U.S. Treasury Department, the report shows. Payments fell below $ 250 billion in May 2021.
More from Personal Finance:
Troubled borrowers as Biden assesses student loan amnesty action
Are you still missing your tax refund? You will soon receive 5% interest
Why 2022 was a dangerous time to retire and what you can do about it
These payments reflect taxes that have not been withheld from salaries – which often include capital gains, dividends and interest – along with withdrawals paid from so-called pass-through assets, with profits flowing into the owners’ individual tax returns.
“It’s a surprising increase,” said Alex Arnon, associate director of policy analysis for the Penn Wharton budget model, who worked on the analysis.
The Treasury in May reported a $ 308 billion surplus for April, a record monthly, with revenue reaching $ 864 billion, which more than doubled the previous year’s amount.
There was a $ 226 billion deficit for April 2021, with lower revenue due to the one-month extended fiscal deadline.
Additionally, investors with mutual funds in taxable accounts may have seen something bigger than expected end-of-year distributions.
Wharton’s analysis also highlights higher trading volumes in recent years, which may have contributed to higher capital gains in 2021.
After soaring earnings in 2021 and volatility in 2022, some advisors may be considering tax opportunities.
“Last year’s fiscal gains were brutal,” said certified financial planner Karl Frank, president of A&I Financial Services in Englewood, Colorado. “When you combine that with this year’s losses, investors have a double whammy.”
One option to consider is the sale of loss-making assets to offset future gains, known as tax loss collection. If your losses exceed your earnings for the year, you can use up to $ 3,000 to reduce your normal income taxes.
For taxable accounts, check the amount of income assets created before making purchases. In general, exchange-traded funds tend to be more tax-efficient than actively managed mutual funds, Frank said.
Obviously, the location of resources is also importantas tax-free and deferred accounts protect investors from the current year’s capital gains.
However, “don’t let the tax queue unleash the investment dog,” warns Frank. It is important to consider your complete financial plan when choosing assets and accounts.