The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 103 - Minimize Taxes from Your Stock Portfolio
Tax planning for stock portfolios offers significant wealth-building opportunities when approached strategically. We dive deep into how different types of portfolio income are taxed and explore advanced strategies to minimize tax impact while maximizing growth potential.
• Understanding the difference between portfolio income (stocks, dividends, capital gains) and passive income (real estate)
• Short-term capital gains are taxed at ordinary income rates up to 37% plus potential 3.8% net investment income tax
• Long-term capital gains receive preferential tax rates (0%, 15%, 20%) depending on income brackets
• Qualified dividends receive the same favorable tax treatment as long-term capital gains
• First $47,000 of long-term capital gains ($94,050 if married filing jointly) can be completely tax-free
• Capital losses can offset capital gains from any source, with excess losses offsetting ordinary income up to $3,000 per year
• Tax-deferred accounts like 401(k)s eventually tax all withdrawals at ordinary income rates, not capital gains rates
• Strategic timing of capital gains can dramatically reduce tax liability
• Using ordinary business losses to offset capital gains from portfolio liquidations
• Qualified Opportunity Zones can defer, reduce, and potentially eliminate taxes on capital gains
• Utilizing tax-free vehicles like Roth IRAs and borrowing against appreciated stock positions
• Taking advantage of years with low income to realize gains at 0% tax rate
To learn more about implementing these strategies for your specific situation, visit prosperLCPA.com/apply or taxplanningchecklist.com to get on our list and be invited to free educational events.
If you have a stock portfolio of any kind and you're wondering how is this being taxed and how can I win the tax game regarding this stock portfolio income, listen up, because we're going to dive deep into this topic here and give you actionable guidance here. So what we're going to discuss is what is portfolio income In the eyes of the IRS? How is your stock portfolio tax? We're also going to discuss how to avoid taxes from your capital gains events and your interest income and your dividends income, and then, finally, we're going to talk about really where some advanced strategies that the wealthy are using here with their stock portfolio to build that generational wealth, what are the secrets, what are the things that are reserved for the wealthy 1% that you can start using with your stock portfolio to create massive tax savings and massive wealth. So let's get started here. First, I want us to go into what is portfolio income. We're going to start off with some of the basic, less exciting stuff before we get into the strategies, so you understand exactly what are we talking about here. So when I'm referring to portfolio income, I am talking about stocks. I'm talking about capital gains and short-term capital gains, long-term capital gains from those stock investments. I'm talking about interest income and dividend income. You're going to see your stock income when you do your taxes on your form 1099B. What I am not talking about is real estate investing income. Real estate investing income is passive income and a lot of people will confuse this. They will think that passive income and stock income or portfolio income is the same thing, and it absolutely isn't. Sure. In general conversations you could say it's passive because you're not doing anything. But if you look at the technical definition of passive income stock portfolio income is not passive income. Real estate and also businesses where you invest and do not materially participate that's a whole other tax treatment. That's a whole other bucket of tax treatment. Then we'll talk about how they relate. But passive income, which is going to be for most of you listeners, real estate income and for a small select few it'll be if you are passively invested into a partnership or an S-Corp. But for almost all of you listening, your passive income is going to be just your real estate and your portfolio is your stocks.
Speaker 1:So now we have that basic concept down here, let's talk about how it's taxed, or at least how it's taxed, before we do any proactive planning here. So we have short-term capital gains and long-term capital gains. Your short-term capital gains are taxed just how your ordinary income taxes are taxed, so you have those marginal rates on the federal level going up to 37%. You also have on top of that what we call net investment income tax. So if your income is over $200,000, if you're single, or $250,000, if you're married, filing joint, you pay an extra 3.8% tax. So what that means is you could be paying 37% with your federal income tax plus an additional net investment income tax. So that could take you to 40.8%. Almost 41% of your short-term capital gains could be going to the government. Now, actually more than that. And I'll tell you, when you consider state taxes as well, for long-term capital gains you're taxed a little bit more favorably.
Speaker 1:We have different capital gains brackets for long-terms. They're a lower bracket and they are capped at 20%, and that same threshold applies where you may also be paying the net investment income tax on top of that. So the highest federal rate we're going to see here for long-term cap gains is we can pay as much as 23.8% on federal taxes on that, and that's for stock that you've held for greater than a year. So short-term capital gains under a year, taxed normally, plus 3.8%. If you're over those thresholds, long-term cap gains taxed less may be also taxed with an additional 3.8% net investment income tax. And then we have our dividends. Most of you guys here are going to have dividends that are taxed the same way as your long-term capital gains. So same brackets, and we'll go into what those brackets mean in just a little bit and how they come together of. You will have what we call non-qualified dividends and that may be involved in REITs and other more unique types of entities where you will be taxed at your ordinary income rate.
Speaker 1:With those dividends, the long-term capital gains brackets, which is also likely, your dividend bracket is going to be, believe it or not, 0% on your first $47,000 of income, or $94,050 if you're married filing joint. So imagine if you're at a $0 bracket. We could potentially have almost $95,000 of long-term capital gains untaxed. We'll talk about some ways to take advantage of that possibility. Then it gets to the 15% bracket if you're single. That's when your income is up to 518,000, married filing joint 583. And once you're making over 518 or 583, single or married filing joint gets up to 20%.
Speaker 1:Now, in addition to that, when you have these capital gains events, it drives your overall taxable income up. So if you have a half a million dollars of long-term cap gains, that's the taxable income by which the taxation on your W-2 is. So it may also drive up the taxation on your ordinary income. So it has this kind of blended impact on at what rate are you being taxed for your ordinary income. So it has this kind of blended impact on at what rate are you being taxed for your ordinary income. So a cap gain event may actually create more taxation than you would expect. With all these factors and again, don't forget about the fact that you could potentially be paying a decent amount of state taxes on top of that what we typically find is the states will tax this investment income in the same manner they would tax ordinary income estate taxes.
Speaker 1:Suddenly, capital gains in your stocks is a seriously planning opportunity here, or challenge or burden, whatever you want to call it, depending on your level of proactivity here as well. So some other things I want you to think about here. While, yes, there are some tax advantages of the long-term cap gain, a lot of you also have stock portfolios in your tax-deferred or tax-free accounts. Obviously, if it's in the Roth, you'll never pay taxes on it. If it's in a 401k and a lot of you listening do have 401ks or IRAs with your employers what's happening is you put the money into these tax deferred accounts. It reduces your taxes by that amount, even if you're investing in stocks, because it's in that 401k.
Speaker 1:When you take the money out of that 401k, the proceeds are going to be taxed at your ordinary rate, not the favorable long-term cap gains rate. So think about this for a second. Here you put the money. Instead of putting the money into a stock portfolio where you can eventually get that favorable long-term cap gains bracket, when you take it out, you put it into this tax deferred account. Well, this sounds great, I'm reducing my taxes. But then it grows and compounds with all of these stock gains and then when you eventually take it out, you're not going to be taxed like you would for stock gains. You're going to be taxed at your ordinary marginal rate. So there is a possibility that it creates a future taxation on those stocks that is greater than what that investment would have been had he not done it through the IRA or whatever tax deferred vehicle, and just done it in your own name or you can actually take advantage of the more favorable treatment of those long-term cap gains.
Speaker 1:Some of you also may have some interest income that's considered portfolio income. We're not going to discuss interest income too much here. It's just taxed at your marginal rate. There's no FICA tax and, by the way, none of this is going to be subject to self-employment or FICA taxes. And that's pretty much the extent that we're going to discuss interest income here.
Speaker 1:Some other features I want to help give you clarity on here is you can net all your capital gains and losses against each other, regardless of whether it's portfolio income or not. So what I mean by that is if you have a real estate capital gain event, you can use stock losses to offset your real estate cap gain, and the inverse is true as well. If you have a real estate loss, it can offset the taxation on the stock capital gain. Some other things to feature here is you cannot use capital losses to offset dividend income or interest income and your passive real estate losses, unless you have real estate, professional tax status or short-term rentals. But if you cannot use your real estate losses to offset your ordinary sources of income as it is, it will not offset your capital gains or your dividend income. It's going to most likely stay in that passive income bucket to offset other sources of passive income or passive capital gains from that bucket in the future. So losses could be potentially stuck in that bucket if you don't have a way to get those losses out and to create the tax savings right away.
Speaker 1:So there are some limitations on how we can use our losses between these things. So there are some limitations on how we can use our losses between these things. Oh and then another thing to think about here is if you have real estate, if you have capital losses, they can offset your cap gains that year and then they carry forward indefinitely to offset your ordinary or any source of income by the amount of $3,000 per year until you've pretty much worn it out. So let's say that we have a capital loss of $30,000 and we don't have any other capital gains for it to offset. So for the next 10 years you'll take a $3,000 deduction until you've pretty much used up that reserve of capital losses here. So you know, even with the favorable long-term cap gains bracket, we can see a 23.8% federal plus state. We can get as high as, even above 30%, depending on your state our marginal rate. So we're talking about as much as around 50%, where we take the money out of our tax deferred accounts, even though it's invested into those typically tax advantaged vehicles that are stocks and investments incomes.
Speaker 1:So now that we know the very basics, I would say, of how this all kind of comes together here, right, let's talk about. I want to spend the rest of this conversation now talking about the strategies and the things you can do to be proactive here and mitigate your taxes in a way where you can really create some serious wealth in tax savings here. So let's talk about what we see people do and some common solutions here to mitigate these cap gain events and the potential taxation which, as we already know, can be significant. And these strategies will also offset your dividend income and interest income and in most of these circumstances, or at least some of them we'll dive into a little more detail here but ordinary losses this is one of the simplest things that we find. So some of our clients will say, oh, I really want to go all in on this real estate investment. How about I just liquidate some stocks? Well, oh no, I can't do it. Some people are afraid of the taxes on it or they don't think that they have any losses to offset the gains and they're like petrified of the taxes here.
Speaker 1:Well, if you create an ordinary loss so let's say you liquidate some stock to invest into a short-term rental and do a cost tag the losses from that short-term rental will offset not only your ordinary income but the income from the stock. So think about this for a second here. Some of the money when you sell your stock also is going to be the principal. So let's say I have $200,000 of Apple stock and my basis is $100,000. I liquidate it to put it down into a $1 million property. Well, I got to mitigate not $200,000 in cap gains. I'm accessing $200,000, but I only have to mitigate $100,000 of the cap gain and I'm using all $200,000 to purchase this asset and do a cost seg.
Speaker 1:And there's a good depending on how the loss shakes up, there's a good possibility we'll mitigate some or all that taxes or maybe even create losses in excess of the capital gain event, because that principle is untaxed and we have the liquidity to invest into assets that'll create significant deductions. Same example we have the Apple stock. We invest all $200,000 into oil and gas and I wouldn't be surprised that oil and gas investment creates a tax deduction in excess of $100,000. So let's say we get a tax deduction of $150,000 to $180,000. We actually wind up with a net tax savings. So ordinary losses a lot of times are the byproduct of these cap gain events, where a lot of you here are recognizing these cap gains simply because you want to do something else with the money, with your business, and you're putting that money into your business in a way that creates tax savings. And at the end of the day, if that's going to happen, we may find that the capital gains opportunities and issues kind of fix themselves just because of how you're going to treat this income and how you're going to redeploy it. Certainly, you want to make sure you do this before the end of the year. If that's, your strategy is to redeploy the funds into something else that'll further reduce your taxes.
Speaker 1:Now let's talk about some more advanced strategies Qualified Opportunity Zones and just keep in mind it is June of 2025. We're expecting a revamp and enhanced opportunities in tax savings with QOZs and qualified opportunity zone funds will allow you to defer the taxes as of right now. That's deferred until 2026. You may be able to reduce the taxes from what we call a step-up basis and there are all these other advanced strategies when you work with the right people to reduce or mitigate or finance the cost of the taxes when they become due. So that's one way where we can deploy our capital gains into these qualified opportunity zone funds to mitigate and defer and reduce the taxes on these events. And what's really exciting is then, when you hold your investment in the QOZ remember you create an immediate tax savings, so you have more invested into this vehicle. Not only do you see profit over the time, but when you exit, there is no more taxes on the exit, so you will have a tax-free exit on wherever that profit is 10 years down the road from now. So we are building this tax-free bucket and we are creating an opportunity to have an exit that is unlimited, and some of the folks we've seen create literally millions of dollars of tax-free income by holding their investments into qualified opportunity zone funds.
Speaker 1:And this could be any capital gain event real estate cap gain, stock cap gain. This could also even be cryptocurrency cap gain, the sale of your home. If it's taxable and exceeds the thresholds, that could be the cap gain as well. So another thing we want to think about here is timing. Timing is really always critical here when it comes to tax planning. A lot of this comes down to timing. Even QOZs has a crucial timing element of it stocks. You want to pick those or wait until those stocks become long-term capital gains instead of short-term capital gains, as we discussed earlier.
Speaker 1:You're going to have a more favorable tax rate for long-term capital gains rates than you gains events, than you would short-term capital gains events. For instance, just looking at the highest level taxation, the highest amount of federal taxes on your long-term cap gain is going to be 20%, or really 23.8% when you factor in the net investment income tax. But if it's a short-term cap gains, it gets to 40.8%. Man, that could be painful. Also, think about loss netting, not only using ordinary losses, as we discussed earlier. If we can free up some capital losses so if we have losses, even in cryptocurrencies, or losses from our other stocks we can activate those unrealized losses in the year of the gain to create an overall tax reduction and then thinking about the year of the transaction. So not just so we can convert short-term cap gains to long-term cap gains, but what tax bracket are you in If you're going to drive from the 20% to the 15% tax bracket.
Speaker 1:That may create some savings. Or maybe you break up the long-term capital gain event into multiple years so you avoid having so much income that you're driven into the higher tax brackets. Or maybe you know that this is an extraordinary year. You're at a high bracket, so you wait until next year, where you know that you're going to have lots of depreciation and you can maybe even not pay any taxes at all on those long-term capital gains taxes. Here's another way where you can see the benefits and the economic benefits of the growth of your stock portfolio without paying any taxes at all, and that is you can borrow from your stock portfolio. You can use it as collateral and as your stock portfolio has grown, you have more that you can borrow against. And maybe you borrow against it to buy more assets and further reduce your taxes or create more wealth and allow you to now pay it back with the income generated from whatever you borrowed against your stock. And then there is the.
Speaker 1:Here's another one not to be overlooked, which is the Roth IRA, and we are working proactively with our clients here to move funds into that tax free bucket, the Roth IRA. Once it is in there. You do not pay taxes on from your IRA into the Roth and this is really fun for our clients that quit their W-2s for full-time real estate investing. Or maybe one of them gets rep status. Someone quits their job. Now they have control over their retirement accounts, where it used to be controlled by their former employee or some bank. Now they can do whatever they want with it. So they say I'm going to get rep status, I'm going to do tons of cost eggs, I'm going to finally buy that vehicle and write it off legitimately. Now we're going to do all these strategies and drive down our taxes so low and that's going to offset the conversion from our 401k and put it into the Roth. We're going to pay little or no taxes on this conversion because of all these write-offs and now we have this beautiful tax-free Roth IRA that's going to grow and compound over time.
Speaker 1:And also you can take the money out, at least the principal, the amount that you've already paid taxes on. You can take it out anytime, so you don't have to wait until you're 59 and a half to actually take the money out of the Roth. Another concept here is you can still put the money into the tax deferred account. You know you're in a high bracket and maybe now is not the time to pay taxes on your investments, and you can save that taxable event to a later date by putting into the 401k. While we discuss all the negatives and the fact that it will eventually be taxed at your marginal rate, there are ways we can be proactive and this will make sense for some of you to actually put funds into the tax deferred vehicles like the 401k and the traditional IRAs, or even pension plans, cash balance plans, and with proper planning and timing and investment strategies, you can move it eventually into that Roth IRA or take it out in a way in a very tax advantageous manner. Some of you may even want to invest in some stock portfolios using private placement, life insurance and other life insurance vehicles where it's held within that life insurance product, so you can borrow from it and it'll grow tax-free as well. It's a more sophisticated strategy. This is that some of our more affluent clients like to stack on top of their other investment strategies and really build the tax advantage wealth that we're all trying to achieve here.
Speaker 1:And then another thing we want to talk about is taking advantage of the $0 tax bracket. So you may find, with certain investment opportunities or just the unpredictability of your business or situations or access to depreciation that you're getting, or maybe you buy a business with lots of assets you may find that you're in a $0 tax bracket. In a $0 tax bracket, well, don't stop there. It's great that you're not paying any taxes, but let's never let a good tax bracket go to waste here. So if you're in a $0 tax bracket, you have no income.
Speaker 1:If your depreciation offsets all your income here, let's start thinking about liquidating some stocks. Remember we talked about roughly your first $45,000 is untaxed. If we have long-term capital gains in your single up to $90,000 if you're married that means we could sell this stock and pay zero taxes on the cap gain. We could actually sell more than that, because you also have your itemized deduction and your standard deduction, which is going to be around $15,000 to $30,000 if it's standard, or even more than that, and if you don't use it, you lose it. So you have this opportunity for some of you folks who find yourselves in showing $0 of income to actually capitalize on this opportunity and avoid future taxation. You could potentially avoid $100,000 of potential taxable income in the future by taking advantage of this low tax bracket and being cognizant of the timing of these transactions here.
Speaker 1:And let's say you want to keep your stock, well, you could just buy it back. You love your Apple stock? Okay, fine, sell it, pay no taxes on the gain and then just buy it back, and then you'll continue to see the growth, the compounding nature of this wealth and you're going to continue to see potential dividend income or whatever that is producing for you. So why not Just remember, if you're in a really low bracket and maybe that's a result of tax splitting or some other reasons don't stop there. Really take advantage and milk it for all it's worth, because you never know when again you can find yourself in such a favorable situation here.
Speaker 1:So obviously there's lots of things we can think about. I hope I didn't overwhelm you with ideas and I probably did, because I listed out a ton of stuff but certainly, hopefully, you can start using some of these in your own portfolio and realize that there's a lot of planning opportunities with your portfolio. So if you want to learn more about this and see what maybe fits you more clearly and how do all these concepts apply to you here, I suggest you go to prosperlcpacom, slash apply or taxplanningchecklistcom if you want to just start learning more and get on our list and get invited to free events lots of cool stuff. All right, I really hope this helped you out in understanding the wide world of capital gains planning opportunities and the unique treatment of your stock. Certainly they are.
Speaker 1:It is a tax advantage vehicle and it is a great wealth-building vehicle, and your ability to build and grow and compound your wealth with stocks will be amplified when you take advantage of these additional opportunities that we discussed, whether it's timing, whether it has to do with advanced financial vehicles, qualified opportunity zone funds, maybe borrowing tax-free vehicles like the Roth tax-deferred vehicles, and also timing and taking advantage of low brackets. There's so much that we can do here when we're proactive and really looking to grow and compound your wealth in this portfolio income bucket. All right, have a great day. Really hope this helped. Send me some feedback and let me know if you have any questions. I really hope I'm helping you guys out in your journey to achieve financial freedom and win the tax gain. Have a good one.