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Capital gains could have triggered more individual taxes for 2021

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The U.S. Department of the Treasury constructing

Julia Schmalz | Bloomberg | Getty Images

Some investors could also be grappling with the sting of higher-than-expected capital gains for 2021 and losses in 2022. But experts say tax-planning opportunities may soften the blow.

Individuals paid significantly more taxes this season, and the surge in capital gains in 2021 could also be guilty, in line with an evaluation from the Penn Wharton Budget Model.

Adjusted for inflation, filers paid greater than $500 billion in April 2022, in comparison with north of $300 billion within the years before the pandemic, based on data from the U.S. Department of the Treasury, the report shows. Payments dipped below $250 billion in May 2021.

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These payments reflect taxes that weren’t withheld from paychecks — which regularly includes capital gains, dividends and interest — together with levies paid by so-called pass-through businesses, with profits flowing to owners’ individual tax returns.  

“It is a striking increase,” said Alex Arnon, associate director of policy evaluation for the Penn Wharton Budget Model, who worked on the evaluation.

The Treasury in May reported a $308 billion surplus for April, a monthly record, with receipts hitting $864 billion, which greater than doubled the previous 12 months’s amount. 

There was a $226 billion deficit for April 2021, with lower receipts attributable to the one-month prolonged tax deadline.  

Capital gains taxes

What’s more, investors with mutual funds in taxable accounts could have seen larger-than-expected year-end distributions.

The Wharton evaluation also highlights higher volumes of trading over the past few years, which could have contributed to higher capital gains in 2021.

Trimming your tax bill

After soaring gains in 2021 and volatility in 2022, some advisors could also be weighing tax opportunities.

“Last 12 months’s tax gains were brutal,” said certified financial planner Karl Frank, president of A&I Financial Services in Englewood, Colorado. “If you pair that with this 12 months’s losses, investors have a double whammy.”

One option to think about is selling losing assets to offset future gains, often known as tax-loss harvesting. If losses exceed gains for the 12 months, you should use as much as $3,000 to cut back regular income taxes.

Don’t let the tax tail wag the investment dog.

Karl Frank

President of A&I Financial Services

For taxable accounts, check how much income assets create before making purchases. Generally, exchange-traded funds are inclined to be more tax efficient than actively managed mutual funds, Frank said.

In fact, asset location can also be vital, since tax-deferred and tax-free accounts shield investors from current-year capital gains.

Nonetheless, “don’t let the tax tail wag the investment dog,” Frank warns. It is vital to think about your complete financial statement when selecting assets and accounts.

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