Capital gains may have caused more individual taxes for 2021
US Treasury building
Julia Schmalz | Bloomberg | Getty Images
Some investors may grapple with the sting of higher-than-expected capital gains for 2021 and losses in 2022. But experts say tax planning opportunities may cushion the blow.
Individuals have paid significantly more taxes this season, and that may be the reason for higher capital gains in 2021, according to an analysis from Ben Wharton’s budget model.
According to the report, after adjusting for inflation, depositors paid out more than $500 billion in April 2022, compared to north of $300 billion in the years leading up to the pandemic, based on data from the US Treasury. Payments fell to less than $250 billion in May 2021.
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These payments reflect taxes not withheld from payroll checks—which often include capital gains, dividends, and interest—along with fees paid by so-called passing businesses, with profits flowing to the owners’ individual tax returns.
“It’s an amazing increase,” said Alex Arnon, associate director of policy analysis at Ben Wharton’s budget model, who worked on the analysis.
The Treasury in May reported a $308 billion surplus for April, a monthly record, with revenue of $864 billion, more than double the previous year’s amount.
There was a $226 billion shortfall in April 2021, with revenue falling due to a one-month extension of the tax deadline.
Capital Gains Taxes
Moreover, investors with mutual funds in taxable accounts may have seen larger-than-expected year-end distributions.
Wharton’s analysis also highlights larger trading volumes over the past few years, which may have contributed to increased capital gains in 2021.
Reduce your tax bill
After gains rise in 2021 and volatility in 2022, some advisors may be weighing tax opportunities.
“Last year’s tax gains have been brutal,” said certified financial planner Carl Frank, president of A&I Financial Services in Englewood, Colorado. “When you combine that with this year’s losses, investors face a double whammy.”
One option to consider is selling losing assets to offset future gains, known as tax loss harvesting. If losses exceed the year’s gain, you can use up to $3,000 to reduce ordinary income taxes.
For taxable accounts, check the amount of income generated before making purchases. In general, exchange-traded funds tend to be more tax efficient than actively managed mutual funds, Frank said.
Of course, the location of the assets is also important, because deferred and tax-exempt accounts protect investors from capital gains in the current year.
However, “Don’t let the tax tail shake the investment dog,” Frank warns. It is important to consider your complete financial plan when selecting assets and accounts.