If your investments have fluctuated wildly this year, you may have already recognized some significant gains and losses. But nothing is decided tax-wise until year end when the final results of your trades will reveal your 2023 tax situation. Here’s what you need to know to avoid tax surprises.
Tax-favored retirement accounts and taxable accounts
If you’ve had wild swings in the value of investments held in a tax-favored 401(k), traditional IRA, Roth IRA or self-employed SEP account, there’s no current tax impact. While these changes affect your account value, they have no tax consequences until you finally start taking withdrawals. At that point, the size of your balance(s) will affect your tax bills. If you have investments in a Roth IRA, qualified withdrawals taken after age 59½ can be federal-income-tax-free.
With taxable accounts, your cumulative gains and losses from executed trades during the year are what matter. Unrealized gains and losses don’t affect your tax bill.
Overall loss for 2023
If your losses for the year exceed your gains, you have a net capital loss. To determine and apply the loss:
Overall gain for 2023
If your gains for the year exceed your losses, you have a net capital gain. To figure out the gain:
Net short-term and long-term gain
A net short-term capital gain is taxed at your regular federal income tax rate, which can be up to 37%. You may also owe the 3.8% net investment income tax (NIIT) (see below) and state income tax, too.
A net long-term capital gain (LTCG) is taxed at the lower federal capital gain tax rates of 0%, 15%, and 20%. Most individuals pay 15%. High-income folks will owe the maximum 20% rate on the lesser of: 1) net LTCG or 2) the excess of taxable income, including any net LTCG, over the applicable threshold. For 2023, the thresholds are $553,850 for married joint-filers, $492,300 for singles and $523,050 for heads of households. You may also owe the NIIT and state income tax, too.
Watch out for the NIIT
The 3.8% NIIT hits the lesser of your net investment income, including capital gains, or the amount by which your modified adjusted gross income exceeds the applicable threshold. The thresholds are:
Year end is still months away
As explained earlier, your tax results for 2023 are up in the air until all the gains and losses from trades executed during the year are tallied up. If you have questions or want more information, consult with us.