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Tax Tip of the Week | Should Uncle Sam Be A Consideration – When or If We Marry September 25, 2019

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Tip, Taxes , 1 comment so far

The new tax law passed in 2017 eliminated some of the so-called “marriage tax penalty.”  But, significant differences still exist when comparing the tax burden of a married couple versus two single taxpayers. One rule of thumb is when both spouses have about the same taxable income; their combined income tax is typically more than had they stayed single. When one spouse has significantly more taxable income than the other spouse then often their combined income tax is less than if they had stayed single. We often cringe when we see weddings near the end of the year. Often, had the couple waited just a few days until after the 1st of the year, significant tax dollars may have been saved. It is difficult explaining to a newly married couple who both received refunds as single taxpayers for the prior year but now have a tax liability as a married couple. Some things in the tax law just simply don’t make sense.

                                -Mark Bradstreet

More than two million American couples will get married this year. Many of them will pay more in taxes because they tied the knot.

The Republican tax overhaul passed in 2017 lowered the cost of being married for many couples. Even so, being married is often more expensive than being two single filers come tax time. If a couple has children and both spouses earn income, they can owe Uncle Sam thousands of dollars every year just for being married.

These marriage penalties, as they’re called, prompt some committed couples to leave the knot untied. Some even have big weddings but don’t marry legally.

While most couples choose to keep this decision private, one famous (well, famous for economists) couple has been pretty open about the decision.

Betsey Stevenson and Justin Wolfers, economists with international reputations at the Gerald R. Ford School of Public Policy at the University of Michigan, have been together for years. They are the parents of two children. But they aren’t married and say one reason is taxes.

Filing as two single people provides the couple with significant tax savings, according to Ms. Stevenson, though she declined to say how much.

By being public, the couple hopes to stimulate policy discussion.

A common complaint about the current tax structure is a difference between couples that have similar incomes and couples in which one partner earns much more. Under the law, a couple whose incomes are far apart often pay less if they’re married, while couples whose earnings are more evenly split often pay the same as or more than two singles.

“Any household where one earner is generating the same income that Justin and I generate together is better off than we are, because of the value of the stay-at-home spouse’s time,” says Ms. Stevenson. She has proposed a tax credit for the second-earning spouse.

Here’s how marriage bonuses and penalties work in practice, based on examples computed on the Tax Policy Center’s 2019 Marriage Calculator. It’s free and useful for what-if calculations.

Marriage Penalties

Many tax provisions penalize married joint filers because the benefit for them isn’t twice the amount that single filers receive.


Maximum deduction for student-loan interest       Single $2,500   Joint  $2,500 

Maximum capital losses deductible from ordinary income  Single  $3,000   Joint  $3,000

Maximum deduction for state and local taxes      Single  $10,000  Joint  $10,000

Traditional IRA deduction disallowance begins      Single  $64,000   Joint $103,000

Roth IRA contribution disallowance begins     Single  $122,000   Joint  $193,000

3.8% tax on net investment income begins     Single  $200,000  Joint  $250,000

Additional 0.9% Medicare tax on wages begins    Single  $200,000  Joint  $250,000

20% rate on certain capital gains and dividends begins  Single  $434,550  Joint  $488,850

37% rate on taxable income begins        Single  $510,300  Joint  $612,350

Mortgage debt eligible for interest deduction      Single  $750,000  Joint  $750,000

Say that two couples each have total income of $225,000 and no children or itemized deductions.

In the first couple, one partner earns $210,000 and one earns $15,000. If they marry, they’ll save about $8,400 compared with filing as two singles.

In the second couple, one partner earns $145,000 and the other earns $80,000. Being married will save them about $300 compared with filing as two singles.

Things change if each couple has two young children and typical deductions for mortgage interest, state taxes and charity. The couple with one high and one low earner has a marriage bonus, although it drops to about $3,200.

The second couple now has a big marriage penalty.

They owe about $4,000 more than they’d pay as two single filers—just for one year. Having a $50,000 capital-gain windfall would add nearly $1,000 to their penalty.

The reasons for these disparities are complex, says Roberton Williams, a tax economist at the University of Maryland.

He says that in a system that imposes higher rates as income rises, like America’s, it’s impossible to tax married couples based on their total income regardless of who earns it while also taxing married couples so they owe the same as two single people.

“The U.S. system creates marriage bonuses and penalties. Other countries avoid this by taxing married couples as two individuals,” Mr. Williams adds. Shifting to such a system could be difficult in the U.S., in part because of community-property laws in some states.

The tax code also has marriage penalties in specific provisions.

For example, singles can’t directly contribute the maximum amount to a Roth IRA for 2019 if they earn more than $122,000. For married couples the limit is $193,000—not $244,000.

The 2017 tax overhaul repealed some marriage penalties and broadened some tax brackets, helping many two-earner married couples. But it retained other marriage penalties and added more.

One is the new $10,000 limit on deductions for state and local taxes, or SALT. This limit is per return, so married joint filers who list deductions on Schedule A get only a $10,000 write-off, while two single filers living together get a $20,000 write-off.

Affluent married couples hoping to buy a home in expensive areas like San Francisco, Washington, D.C., or New York could also feel a pinch. The overhaul dropped the maximum mortgage debt that’s eligible for an interest deduction on new purchases to $750,000 from about $1 million, and the limit is per return.

So an unmarried couple can deduct interest on $1.5 million of mortgage debt, while the limit for a married couple is $750,000.

For couples contemplating marriage, estimating the tax cost can be hard.

One reason is that marriage penalties often vary over time. For example, a two-earner couple may not owe a penalty when they are first married. If they become a one-earner couple when they have children, they may get a marriage bonus.

If both spouses work and prosper, however, their penalty could grow.

Says Ms. Stevenson: “People tell me, ‘I didn’t mind paying more tax when we were first married, but now it’s enough to put a dent in college tuition.’”

Laws also change. Marriage penalties removed by the 2017 overhaul will return after 2025 if Congress doesn’t act.

Yet another complication is that the U.S. tax code provides marriage bonuses, even to couples who owe marriage penalties. For example, a spouse who inherits a traditional IRA or 401(k) account has better options than a non-spouse heir.

Unmarried couples face other costs and issues, of course. They may pay more for health coverage, and they have to prepare two tax returns. They’ll need to take special care with health proxies, powers of attorney and other legal documents giving them decision-making powers over each other and children.

Married couples who currently owe penalties have options for lowering them, but not many. One is to reduce reported  income where possible, say by contributing to tax-deductible retirement plans or spreading taxable capital gains over more than one year.

Also consider the “married, filing separately” status. This choice doesn’t allow couples to file as two singles, and it usually raises taxes. But sometimes it lowers them, as when one partner has a small business that qualifies for a 20% deduction if a higher-earning spouse’s income is excluded. It could also help if one partner has high medical expenses.

How about getting divorced? That’s a lot harder than getting married. And the Internal Revenue Service for decades has had the power to disregard divorces that are solely for tax reasons.

Credit given to:  Laura Sanders.  This was published July 20-21, 2019 in the Wall Street Journal. You can write to Laura Saunders at laura.saunders@wsj.com

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Author – Mark Bradstreet, CPA

–until next week

Tax Tip of the Week | Tax Considerations for Working Kids September 18, 2019

Posted by bradstreetblogger in : Deductions, General, Tax Deadlines, Tax Planning Tips, Tax Preparation, Taxes, Taxes , add a comment

When we file children’s income tax returns, nasty surprises are not commonplace BUT on the other hand they are not rare either. Some not so pleasant surprises may result from the Form W-4 that children will complete for their tax withholdings. Being over withheld may create a larger tax refund but a smaller net payroll check each pay period. On the other hand, withholding too little makes each net payroll check look awesome but may create a tax balance when the income tax return is filed. Another surprise situation may occur when the child receives a Form 1099 (no withholding) instead of a Form W-2 (has withholdings). In this instance, their income tax world immediately becomes more complicated as tax estimates will most likely be needed along with accounting for their income and expenses. As soon as you discover that your child will receive a Form 1099, you should contact your CPA for further information concerning estimated amounts and various tax deadlines. Please remember that not making any required estimated income tax payments may create interest and penalties along with the potential for a large balance due with the tax return.

The below article by Bill Bischoff of MarketWatch drills down further into some of my comments above and discusses some additional ones.  

                            -Mark Bradstreet

5 questions and answers about kids and money

Is your kid earning money from a summer job or some other activity? If so, what are the tax implications? And BTW, what kid-related tax breaks can you collect? Good questions. Here are some answers.

Does my kid need to file a tax return?

Maybe. For 2019, a dependent child must file a federal income tax return on Form 1040 in any of the following situations:

* The child has unearned income of more than $1,100. If your child has more than $2,200 of unearned income, he or she may be subject to the dreaded Kiddie Tax. More on that later.

* The kid’s gross income exceeds the greater of: (1) $1,100 or (2) earned income up to $11,650 plus $350.

* The child’s earned income exceeds $12,200.

* The kid owes other taxes such as the self-employment tax or the alternative minimum tax (AMT). Relatively unlikely, but it happens.

The good news is your child can shelter his or her income with the standard deduction. For 2019, the standard deduction for a dependent kid with only investment income is $1,100. If your child has earned income from summer jobs or whatever, the standard deduction equals the lesser of: (1) earned income plus $350 or (2) $12,200. So up to $12,200 of earned income can be sheltered with the standard deduction. Good.

Key Point: Even if no return is required for your child, one should be filed if federal income tax was withheld for any reason and would be refunded if a return is filed. Filing a return is also necessary to benefit from certain beneficial tax elections, such as the election to currently report accrued Savings Bond income that would be sheltered by your kid’s standard deduction.

Who is responsible for filing the kid’s return?

According to IRS Publication 929 (Tax Rules for Children and Dependents), a child is generally responsible for filing his or her own federal income tax return on Form 1040 and for paying any tax, penalties, or interest. If a child cannot file for any reason, the child’s parent, guardian, or other legally responsible person must file for the child. If the child can’t sign the return, a parent or guardian must sign the child’s name followed by the words “By (signature), parent (or guardian) for minor child.” Your child may also need to file a state income tax return. If so, that probably winds up on your plate too.

Key Point: If you sign a return on your child’s behalf, you can deal with the IRS on all matters related to the return. In general, a parent or guardian who doesn’t sign can only provide information concerning the return and pay the child’s tax bill.

Can’t I just report the kid’s income on my own return?

Probably. If your child will be under age 19 (or under age 24 if a full-time student) as of 12/31/19 and his or her only income is from interest and dividends, including mutual fund capital gain distributions, you can generally choose to report the kid’s income on your return by including Form 8814 (Parents’ Election To Report Child’s Interest and Dividends) with your Form 1040. Read the Form 8814 instructions to see if you qualify for this option. If you do, it may or may not result in a lower tax bill for the kid’s income.

What’s that ‘Kiddie Tax’ I’ve heard about?

Good thing you asked. For 2018-2025, the Tax Cuts and Jobs Act (TCJA) revamped the Kiddie Tax rules to tax a portion of an affected child’s or young adult’s unearned income at the higher rates paid by trusts and estates. Those rates can be as high as 37% or as high as 20% for long-term capital gains and dividends. Before the TCJA, the Kiddie Tax rate equaled the parent’s marginal rate–which for 2017 could have been as high as 39.6% or 20% for long-term capital gains and dividends.

If your kid is a student, the Kiddie Tax can potentially be an issue until the year the child turns age 24. For that year and future years, your child is finally Kiddie-Tax-exempt.

To calculate the Kiddie Tax, first add up the child’s net earned income and net unearned income. Then subtract the child’s standard deduction to arrive at taxable income. The portion of taxable income that consists of net earned income is taxed at the regular rates for a single taxpayer. The portion of taxable income that consists of net unearned income and that exceeds the unearned income threshold ($2,200 for 2019) is subject to the Kiddie Tax and is taxed at the higher rates that apply to trusts and estates.
Unearned income for purposes of the Kiddie Tax means income other than wages, salaries, professional fees, and other amounts received as compensation for personal services. So, among other things, unearned income includes capital gains, dividends, and interest. Earned income from a job or self-employment is never subject to the Kiddie Tax.

Calculate the Kiddie Tax by completing IRS Form 8615 (Tax for Certain Children Who Have Unearned Income). Then file Form 8615 with your kid’s Form 1040. Beware: the Kiddie Tax rules are complicated

Here are the most-common ones.

$2,000 tax credit for under-age-17 child

For 2018-2025, the TCJA increased the maximum child credit to $2,000 per qualifying child (up from $1,000 under prior law). Up to $1,400 can be refundable, meaning you can collect it even when you don’t owe any federal income tax. Under the TCJA, the income levels at which the child tax credit is phased out are significantly increased, so many more families now qualify for the credit.

$500 tax credit for over-age-16 dependent child

For 2018-2015, the TCJA established a new $500 tax credit that can be claimed for a dependent child (or young adult) who is not under age 17 and who lives with you for over half the year. Dependent means you pay over half the child’s support. However, a child in this category must also pass an income test to be classified as your dependent for purposes of the $500 credit. According to IRS Notice 2018-70, your over-age-16 dependent child passes the income test for 2019 if his or her gross income does not exceed $4,200.

Two higher education tax credits

The American Opportunity credit can be worth up to $2,500 during the first four years of a child’s college education. The Lifetime Learning credit can be worth up to $2,000 annually, and it can cover just about any higher education tuition costs. Both credits are phased out as your income goes up, but the Lifetime Learning credit is phased out at much lower income levels than the American Opportunity credit.

Head of household filing status

HOH filing status is preferable to single filing status because the tax brackets are wider and the standard exemption is bigger. HOH status is available if: (1) your home was for more than half the year the principal home of a qualifying child for whom a personal exemption deduction would be allowed under prior law and (2) your paid more than half the cost of maintaining the home.

Student loan interest deduction

This deduction can be up to $2,500 for qualified student loan interest expense paid by a parent, subject to phase-out for higher-income parents.

The bottom line

There you have it: most of what you need to know about kids and taxes. As always, kids are a chore and an expense. But they usually turn out to be worth it in the end. Fingers crossed.

Credit given to:  Bill Bischoff  of MarketWatch. Article is titled “When kids make money at a summer job, who files their taxes?”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | A Retirement Plan Too Often Ignored September 11, 2019

Posted by bradstreetblogger in : Business consulting, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Taxes , add a comment

If your business fits the definition of an owner-only employee business then a Solo 401(k) retirement plan may be a great idea for you.  And, oh yeah, another caveat – you are not allowed to have any employees other than you and your spouse. If your sole proprietorship, partnership, S corporation or C corporation fits the necessary parameters then you may make contributions to a Solo 401(k) plan.

This type of retirement plan allows higher contribution amounts and more investment options than many other retirement plans. The Solo 401(k) even has ROTH options and its account holder may borrow against the plan assets. They are also inexpensive to setup and maintain. Even though created by Congress in 2001 – we still don’t see as many of these plans as I think we should.

If you think you may qualify for the Solo 401(k), please remember that this plan must be formed by year-end for the contributions to be deducted for that same year.

The below WSJ article by Jeff Brown was published on July 9, 2019 and contains additional details.

                                                                                                            -Mark Bradstreet

Millions of U.S. workers rely on employer-sponsored 401(k)s to save for retirement. But what about freelancers, sole proprietors and workers in the mushrooming gig economy, or people who want to leave the corporate cocoon and strike out on their own?

Financial advisers say that far from being left out in the cold, these workers have access to an often-overlooked retirement-savings vehicle that offers some distinct advantages: an “individual” or “solo” 401(k).

Available to self-employed people, as well as business owners and their spouses, solo 401(k)s allow participants to make contributions as both an employer and employee. That means individuals can sock away large sums that dramatically reduce income taxes, among other perks.

Although enrollment data is hard to come by, financial advisers say solo 401(k)s have been slow to get the respect they deserve since they were created by Congress in 2001. Many financial-services firms waited years to start offering the plans, and many business owners who could have them don’t know they exist.

“You’d be surprised how many people don’t know about solo 401(k)s, especially accountants,” says Sean Williams, wealth adviser with Sojourn Wealth Advisory in Timonium, Md.

Perks advisers like

Solo K’s, as some call them, allow participants to avoid the complex rules covering corporate 401(k)s. Not only do solo K’s permit virtually unlimited investing options, they allow participants to choose between making traditional tax-deductible contributions or after-tax Roth contributions. Some advisers prefer them over better-known options for people who work on their own, such as SEP-IRAs (simplified employee pension individual retirement arrangements) and Simples (savings incentive match plan for employees).

“Solo 401(k)s are better than the other options,” says Vincenzo Villamena, a certified public accountant with Online Taxman in New York, “because of the ability to contribute to a Roth and the higher contribution limits.”

Like corporate 401(k)s, the maximum contribution this year for solo K’s is $56,000, including up to $19,000 in pretax individual income, plus an employer contribution. (For people age 50 or older, the maximum is $62,000, due to a catch-up provision.) By comparison, Simples limit employee contributions to $13,000 this year ($16,000 for investors age 50 or over), and employer matches to 3% of compensation up to a maximum of $5,600. SEPs, meanwhile, limit annual employer contributions to $56,000 or 25% of income, whichever is less, and there is no employee contribution.

Contributions to solo K’s cannot exceed self-employment income, which is counted separately from any income earned by working for others.

According to Donald B. Cummings Jr., managing partner of Blue Haven Capital in Geneva, Ill., contributions can come from other sources if regular income from the business is needed to pay ordinary expenses. “Say a 50-plus-year-old business owner inherits $500,000 from a deceased relative. She now has access to better cash flow and can theoretically contribute 100% of her compensation” up to the limit, he says.

An investor also can move cash into a solo K from a taxable investment account, reducing taxable income and getting tax deferral on any future gains.

Opening one up typically takes only a few minutes of paperwork with a financial firm such as Vanguard Group, Fidelity Investments or Charles Schwab Corp. SCHW 1.03% Providers typically don’t require a minimum contribution to open an account, or minimum annual contributions.

Business owners who set up the solo plan as a traditional 401(k) get a tax deduction on contributions, tax deferral on gains and pay income tax on withdrawals after age 59½. (If they withdraw before 59½, they generally will pay both income tax and a penalty.) If they choose to go the Roth route, contributions are after taxes but qualified withdrawals are tax-free, which can be a plus for those who expect to be in a higher tax bracket later in life. And unlike ordinary Roth IRAs, which are available only to people with incomes below certain thresholds, anyone who opens a solo K can pick the Roth option. “The single largest benefit of a solo 401(k) is the ability to contribute Roth dollars,” says Brandon Renfro, a financial adviser and assistant finance professor at East Texas Baptist University in Marshall, Texas. “Since you are the employer in your solo 401(k), you can simply elect that option,” he says. “This is a huge benefit over the other types of self-employed plans.”

Another plus is that account holders can borrow against the assets in a solo 401(k), says Pedro M. Silva, wealth manger with Provo Financial Services in Shrewsbury, Mass. That isn’t allowed with alternatives such as SEPs.

“Business owners often write large checks, and having access to an extra $50,000 for emergencies or opportunities is a valuable feature of the plan,” Mr. Silva says.

Words of caution

A solo 401(k) must be set up by the end of the calendar year for contributions to be subtracted from that year’s taxable income. But, as with an IRA, money can be put in as late as the tax deadline the following April, or by an extension deadline.

Investors who want to change providers can transfer assets from one solo 401(k) to another with no tax bill, as long as the investments go directly from the first investment firm to the second. But if the assets go to the investor first there may be tax consequences, even if they are then sent to the new provider.

Business owners should be aware that the hiring of just a single employee aside from a spouse would require the plan to meet the tricky nondiscrimination test that applies to regular 401(k)s, says Stephanie Hammell, an investment adviser with LPL Financial in Irvine, Calif. That test is designed to make sure executives don’t get a better deal than employees.

Business owners in that situation might do better with a SEP or Simple plan, which don’t have the nondiscrimination hurdle, according to Dr. Renfro.

And as with all financial products, it pays to shop around for the best combination of investment offerings, fees and customer service, experts say.

“Set up your account with an investment provider that either doesn’t charge fees for the administration of the account, or charges very minimal fees,” says Natalie Taylor, an adviser in Santa Barbara, Calif. “Choose an investment provider that offers high-quality, low-cost investment options inside of the individual 401(k) account.”

Credit Given to:  Jeff Brown. This appeared in the July 9, 2019, print edition of the Wall Street Journal as ‘The ‘Solo’ 401(k) Is Often Overlooked.’ Mr. Brown is a writer in Livingston, Mont. He can be reached at reports@wsj.com.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | A Need to Know on Capital Gains Taxes September 4, 2019

Posted by bradstreetblogger in : Business consulting, Depreciation options, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Uncategorized , add a comment

Generally, capital assets that are held in excess of one year and sold at a profit may be taxed at three (3) possible tax rates: (1) 0%, (2) 15% or (3) 20%. For most people, the rate used depends upon their filing status and the amount of their taxable income. Gains from the sale of capital assets not held for a year are taxed as ordinary income. If capital assets are sold at a loss – generally, only $3,000 ($1,500 married filing separate) may be deducted annually unless other capital gains are available as an offset.

Everyone thinks that Congress designed the zero-percent capital gain rate just for them. That thinking is only natural since so many reporters and so many politicians have over-hyped the catchy expression of “zero-percent rate.” The truth is VERY few taxpayers will ever be in position to take advantage of the zero-percent long-term capital gain rate. To do so, for most single and married couples filing jointly, their taxable income not including the capital gains must be less than $39,375 or $78,750, respectively. Remember your taxable income might include any Form W-2s, interest and dividend income, business and rental income etc. But, it also includes the capital gain itself. So, not a very big window exists for the possibility of qualifying for using the zero-percent rate. If your income other than capital gains, less your deductions exceeds these taxable income ceilings then the window not only shuts but disappears as though it never existed. This capital gain tax calculation is not made the same as the calculation of income taxes which are calculated using the incremental tax brackets. And, depending upon the amount of your regular taxable income not including the capital gains above and beyond the amounts of $39,375/$78,750 – you will then use either the 15% OR the 20% tax bracket for the capital gains rate. Don’t forget the “net investment income tax” of 3.8% which could be an additional tax along with your particular state income tax. Ohio taxes capital gains as ordinary income. Also, technically outside the tax world – various income levels may also affect the amount of your Alternative Minimum Tax (AMT), Medicare insurance premiums and the amount of student loan repayments (if applicable).

More information and explanations follow in the article below by Tom Herman as published by the Wall Street Journal on Monday, June 17, 2019.

                            -Norm Hicks and Mark Bradstreet

By tax-law standards, the rules on capital-gains taxes may appear fairly straightforward, especially for taxpayers who qualify for a zero-percent rate.

But many other taxpayers, especially upper-income investors, “often find the tax law around capital gains is far more complicated than they had expected,” says Jordan Barry, a law professor and co-director of graduate tax programs at the University of San Diego Law School.

Here is an update on the brackets for this year and answers to questions readers may have on how to avoid turning capital gains into capital pains.

Who qualifies for the zero-percent rate?

For 2019, the zero rate applies to most singles with taxable income of up to $39,375, or married couples filing jointly with taxable income of up to $78,750, says Eric Smith, an IRS spokesman. Then comes a 15% rate, which applies to most singles up to $434,550 and joint filers up to $488,850. Then comes a top rate of 20%.

But don’t overlook a 3.8% surtax on “net investment income” for joint filers with modified adjusted gross income of more than $250,000 and most singles above $200,000. That can affect people in both the 15% and 20% brackets. For those in the 20% bracket, that effectively raises their top rate to 23.8%. “That 23.8% rate is the rate we use to plan around for high net-worth individuals,” says Steve Wittenberg, director of legacy planning at SEI Private Wealth Management.

There are several other twists, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Among them: a maximum of 28% on gains on art and collectibles. There are also special rates for certain depreciable real estate and investors with certain types of small-business stock. See IRS Publication 550 for details. There also are special rules when you sell your primary residence.

State and local taxes can be important, too, especially in high-tax areas such as New York City and California. This has become a much bigger issue in many places, thanks to the 2017 tax overhaul that included a limit on state and local tax deductions. As a result, many more filers are claiming the standard deduction and thus can’t deduct state and local taxes. But some states, including Florida, Texas, Nevada, Alaska and Washington, don’t have a state income tax. Check with your state revenue department to avoid nasty surprises.

How long do I typically have to hold stocks or bonds to qualify for favorable long-term capital-gains tax treatment?

More than one year, says Alison Flores, principal tax research analyst at The Tax Institute at H&R Block. Gains on securities held one year or less typically are considered short-term and taxed at the same rates as ordinary income, she says. The rules are “much more complex” for investors using options, futures and other sophisticated strategies, says Bob Gordon, president of Twenty-First Securities in New York City. IRS Publication 550 has details, but investors may need to consult a tax pro.

The holding-period rules can be important for philanthropists who itemize their deductions. Donating highly appreciated shares of stock and certain other investments held more than a year can be smart. Donors typically can deduct the market value and can avoid capital-gains taxes on the gain. But don’t donate stock that has declined in value since you purchased it. “Instead, sell it, create a capital loss you can use, and donate the proceeds” to charity, Mr. Gordon says. You can use capital losses to soak up capital gains. Investors whose losses exceed gains may deduct up to $3,000 of net losses ($1,500 for married taxpayers filing separately) from their wages and other ordinary income. Carry over additional losses into future years.

If you sell losers, pay attention to the “wash sale” rules, says Roger Young, senior financial planner at T. Rowe Price . A wash sale typically occurs when you sell stock or securities at a loss and buy the same investment, or something substantially identical, within 30 days before or after the sale. If so, you typically can’t deduct your loss for that year. (However, add the disallowed loss to the cost basis of the new stock.) Mr. Young also says some investors may benefit from “tax gain harvesting,” or selling securities for a long-term gain in a year when they don’t face capital-gains taxes.

While taxes are important, make sure investment decisions are based on solid investment factors, not just on taxes, says Yolanda Plaza-Charres, investment-solutions director at SEI Private Wealth Management. And don’t wait until December to start focusing on taxes.

“We believe in year-round tax management,” she says.

What if I sell my home for more than I paid for it?

Typically, joint filers can exclude from taxation as much as $500,000 of the gain ($250,000 for most singles). To qualify for the full exclusion, you typically must have owned your home—and lived in it as your primary residence—for at least two of the five years before the sale. But if you don’t pass those tests, you may qualify for a partial exclusion under certain circumstances, such as if you sold for health reasons, a job change or certain “unforeseen circumstances,” such as the death of your spouse. See IRS Publication 523 for details. When calculating your cost, don’t forget to include improvements, such as a new room or kitchen modernization.

Credit given to Tom Herman. This article appeared in the June 17, 2019, print edition as ‘A Need to Know on Capital-Gains Taxes.’ Mr. Herman is a writer in New York City. He was formerly The Wall Street Journal’s Tax Report columnist. Send comments and tax questions to taxquestions@wsj.com.

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This Week’s Author – Mark Bradstreet, CPA & Norman S. Hicks, CPA

–until next week.