20 Dec 2022 Large Capital Gain in 2022 – What Can I Do?
Authored by Haynie & Company Partner Bernard Abercrombie, CPA
Over the last few years, many of our clients have found themselves with large taxable capital gains. Though there are lower capital gains tax rates, a taxpayer with a large capital gain will end up paying 20% to 23.8% depending on their overall income level and what was sold.
The maximum capital gains tax rate is 20%, but there is an additional surcharge of 3.8% when net investment income, including capital gains, exceeds $250,000 for a married couple. These rates are lower than the maximum ordinary tax rate of 37% taxpayers are frequently looking to lower their taxes. Generally, the sale of an active business is not subject to a 3.8% surcharge.
Donor Advised Fund
A frequent strategy used when an extraordinary gain occurs, such as the sale of a business or an investment property, is to utilize a Donor Advised Fund. A Donor Advised Fund allows someone with a significant charitable intent to make a large contribution, in the year of the sale, creating a large charitable contribution deduction in that year. The Donor Advised Fund takes in that contribution but distributes the actual contributions to the charities over a period of years. The taxpayer benefits from the large deduction in the year of the sale but also covers the taxpayer’s intended charitable contributions over a period of years.
A more recent option, passed in 2017, is the utilization of Opportunity Zones. The program was designed to spur investment in economically distressed communities. Specific areas throughout the country are designated as Opportunity Zones. Though someone can invest directly into one of these zones, they are usually invested through funds set up as partnerships or corporations due to the rigorous requirements.
The requirement details are beyond the scope of this article, so we will focus on the tax impact. Capital Gains rolled into an Opportunity Zone are deferred until December 31, 2026 (or the date the investment is sold, if earlier). In addition, the investment must be made within 180 days of the capital gain. This is only available for gains incurred in the second half of 2022.
Additionally, gains invested in an Opportunity Zone, held for five years receive a step-up in basis of 10% and those held for seven years receive a step-up of 15%. This effectively reduces the capital gains by 10% to 15% when held for the appropriate amount of time.
Finally, if the Opportunity Zone investment is held for ten years, any additional gain above the original gain is not taxed. So, if the original gain invested in the Opportunity Zone was $500,000, held for at least ten years, and the value at the end was $800,000, there would be no tax on the additional $300,000.
Capital Gains can be complex. Consult your tax advisor for more information. We at Haynie & Company would be happy to assist you with all your tax planning needs.
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