Have you ever thought about selling your house or liquidating a stock position but are unsure of the tax consequences? As a Lockheed Martin employee, you should be aware of the capital gains tax, particularly if your gains are considered short-term.

As a refresher, when you sell an asset such as property or stock for more than you paid, a capital gain occurs. The price you paid is known as the cost basis. Once you sell the asset for more than the cost basis, the holding period will determine if the gain is long-term or short-term. A holding period of one year or less is considered short-term. 

Short-term capital gains should be avoided because they are taxed at higher rates than long-term capital gains. Short-term capital gains are taxed at your marginal tax bracket, which is the same rate as your income tax. Should you sell an asset for less than you paid for it within a year of purchase, a short-term capital loss would occur. We will discuss capital losses in a separate post.

Let’s use Jim and Sue as our example in order to have a better understanding of why you want to avoid a short-term capital gain if possible.  Jim and Sue are married and file their taxes jointly.  They have a taxable income of $90,000.  They purchased XYZ stock on January 1, 2020, for $500. They intend to sell their XYZ stock on December 30, 2020, for $1000. This would result in an approximate tax of $110 because the holding period was less than one year and was taxed at their regular income tax rate of 22%. However, if they had waited to sell the stock until January 2, 2021, then their approximate tax would be $75.00 because the sale would qualify for long-term capital gain treatment and would be taxed at the long-term rate of 15%. Waiting until the later date to make the sale would provide them with a tax savings of $35.00. 

Short-Term Capital Gain
Sale Price (sold 12/30/2020) $1000
– Cost Basis $500
= Short-Term Capital Gain $500
Simplified Approximate Tax ($500 x 22%) $110
Long-Term Capital Gain
Sale Price (sold 1/2/2021) $1000
– Cost Basis $500
= Long-Term Capital Gain $500
Simplified Approximate Tax ($500 x 15%) $75.00
Tax Savings by Waiting Until 1/2/2021 to Sell $35.00

 

  To visualize the tax rate difference between a short-term capital gain and a long-term capital gain, below is a comparison of the brackets used in the example. As you can see, the long-term capital gains rates are more favorable than the short-term capital gains rates. Even waiting one day before selling an asset can lock in a lower tax rate!

Exhibit A: 2021 Marginal Tax Brackets (applies to short-term capital gains)

Exhibit B: 2021 Long-Term Capital Gains Brackets

We are serious about tax planning at SWMG and our software programs allow us to see the short-term or long-term gain status of individual investment holdings within a portfolio. This provides us the opportunity to strategically determine how long to hold certain positions and which ones to sell, ultimately saving our clients in tax dollars. Additionally, our Lockheed Martin Retirement Specialists will look at your entire personal situation to align your financial goals with your risk tolerance to develop a comprehensive financial plan. We invite you to check out our website to see how we can optimize your taxes and your financial future.

For more tips like these, click here to sign up for our weekly email blog newsletter. If you would like to get better educated on Lockheed retirement strategies, click here to download our Free Report titled Retire with Confidence: The Top 4 Things You Can Do Now to Maximize your Lockheed Retirement. And, if you want to have face time with a Lockheed Retirement Specialist², you can click here to schedule an appointmentclick here to sign up for our Lockheed Retirement Workshop or click here to just give us a call (817) 210-3444.

Be sure and check back next week for more incredibly valuable information. Cheers!

Disclosures*

Financial Planning and Investment Advisory offered by SWMG, LLC a Registered Investment Advisor.

Lockheed Martin Retirement Specialist is not an official title or professional designation nor is it conferred by Lockheed Martin on any individual or company.

Our Complementary consultation and free report are for informational purposes only and provided free without any obligation to utilize or retain our investment advisory services.

SMWG, LLC is not affiliated with or endorsed by Lockheed Martin Corporation. Our expertise comes from working with LMT employees for several years and helping them to retire with confidence.

Investing involves the risk of loss, including loss of principal. Past performance does not guarantee future results. Investment products are not FDIC insured, have no bank guarantee, and may gain or lose value. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable for a client’s investment portfolio.

iHeart Radio Ask The Experts