Capital gains may have triggered hundreds of billions more in individual taxes for 2021, analysis shows. How to trim your tax bill

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  • If you’re grappling with higher-than-expected capital gains taxes for 2021 and the brunt of losses in 2022, experts say there may be ways to soften the blow.
  • According to an analysis by the Penn Wharton budget model, filers overpaid hundreds of billions in taxes for 2021, and a rise in capital gains may be to blame.
  • “Last year’s tax benefits were brutal,” said Carl Frank, president of A&I Financial Services. “When you combine that with this year’s loss, investors are getting a double whammy.”

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Some investors will be grappling with higher-than-expected capital gains for 2021 and losses in 2022. But experts say tax-planning opportunities could soften the blow.

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Individuals have paid significantly higher taxes this season, and a rise in capital gains in 2021 could be to blame, according to an analysis From Penn Wharton Budget Models.

The report shows that based on US Treasury Department data, adjusted for inflation, filers paid more than $500 billion in April 2022, compared to north of $300 billion in the years before the pandemic. Payments fell below $250 billion in May 2021.

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These payments reflect taxes that were not withheld from paychecks — which often include capital gains, dividends and interest — along with levies paid by so-called pass-through businesses, along with gains in owners’ personal tax returns.

“It’s an astonishing increase,” said Alex Aron, associate director of policy analysis for Penn Wharton budget models, who worked on the analysis.

treasure in may informed of A surplus of $308 billion for April, a monthly record, with receivables at $864 billion, more than double the amount the previous year.

There was a $226 billion deficit for April 2021, with lower receipts due to the one-month extended tax deadline.

capital gains tax

According to the analysis, the sharp increase in tax payments reflects "unprecedented growth" in 2021 earnings, including double-digit stock market gains.

The S&P 500 jumped 26.89% in 2021, while the Dow Jones Industrial Average and Nasdaq Composite gained 18.73% and 21.39%, respectively.

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In addition, investors with mutual funds in taxable accounts may have seen higher-than-expected distributions at the end of the year.

The Wharton analysis also highlights the high volume of trading over the years, which may have contributed to the higher capital gains in 2021.

trimming your tax bill

After rising gains in 2021 and volatility in 2022, some advisors may weigh tax opportunities.

"Last year's tax benefits were brutal," said certified financial planner Carl Frank, president of A&I Financial Services in Englewood, Colorado. "When you combine that with this year's loss, investors are getting a double whammy."

One option to consider is selling the losing asset to offset future gains, a process known as tax-loss harvesting. If the loss exceeds the gain for the year, you can use up to $3,000 to reduce regular income taxes.

Don't let the tax tail distract the investment dog.
karl frank
President of A&I Financial Services

For taxable accounts, check how much income the property generates before making a purchase. In general, exchange-traded funds are more tax efficient than actively managed mutual funds, Frank said.

Of course, asset location is also important, as tax-deferred and tax-exempt accounts protect investors from current year's capital gains.

However, "don't let the tax tail wag the investment dog," warns Frank. It is important to consider your overall financial plan when choosing assets and accounts.

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