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December 31, 2024
Lawyers and Capital Gains: Tax Planning Strategies Before the Year Ends
As a lawyer, your attention is often focused on your clients, cases, and growing your practice. But what about your own financial future? For many lawyers, capital gains taxes can be an often-overlooked part of their financial strategy, especially when it comes to investments, partnership interests, and asset sales. The good news is there are smart moves you can make before the year ends to minimize your capital gains taxes and maximize your wealth.
Capital gains taxes can take a significant bite out of your profits, but with a little planning and insight, you can reduce your liability. Below are the key strategies every lawyer should consider before December 31.
1. Time the Sale of Assets to Manage Capital Gains Taxes
One of the most powerful strategies for minimizing capital gains taxes is simply timing the sale of your assets. The IRS distinguishes between short-term capital gains (on assets held for less than one year) and long-term capital gains (on assets held for more than one year).
- Short-term capital gains are taxed at ordinary income tax rates, which can be as high as 37% for high-income earners.
- Long-term capital gains, however, are taxed at lower rates—either 0%, 15%, or 20% depending on your income.
Why timing matters:
- If you’re nearing the one-year mark for an investment, holding it just a little longer can allow you to qualify for the lower long-term capital gains tax rate.
- Conversely, if you’ve had a lower-income year, selling assets and realizing gains now could keep you in a lower tax bracket.
Pro Tip: Consider your expected income for next year and the capital gains rates to determine if it’s worth holding onto or selling an asset now.
2. Use Tax-Loss Harvesting to Offset Gains
Tax-loss harvesting is one of the most effective ways to reduce your capital gains taxes. It involves selling investments that have lost value to offset the gains from your profitable investments. This strategy can significantly reduce the taxes you owe on your capital gains.
Here’s how it works:
- Sell investments at a loss: If you have investments that are underperforming, sell them to realize a capital loss.
- Offset your gains: Use those losses to offset the capital gains from other investments. You can deduct up to $3,000 of capital losses against ordinary income each year.
- Carry over losses: If your losses exceed your gains, you can carry over the remaining loss to future tax years, further reducing your tax liability.
Pro Tip: Review your investment portfolio now to see if there are any assets that can be sold to harvest tax losses and minimize your taxable gains for 2024.
3. Explore Qualified Opportunity Zones to Defer or Reduce Capital Gains
If you’re looking to defer or reduce your capital gains taxes, Qualified Opportunity Zones (QOZs) may be a smart option. These are designated areas where investments are incentivized by offering tax benefits.
Here’s why QOZs are attractive:
- Deferral of taxes: If you reinvest capital gains into a Qualified Opportunity Fund (QOF), you can defer paying capital gains taxes on those gains until 2026.
- Reduction of taxes: By holding your QOZ investment for at least five years, you can reduce the amount of the deferred capital gain by 10%.
- Elimination of future gains: If you hold the QOZ investment for 10 years or more, any additional capital gains on that investment are completely tax-free.
Pro Tip: QOZs are an excellent option if you’re looking for both long-term investments and immediate tax benefits. Consult with your CPA to identify qualified opportunity zones that align with your financial goals.
4. Review the Tax Treatment of Investments and Partnership Interests
For lawyers who have investments in real estate, stocks, or partnership interests, it’s essential to understand how these are taxed. Different types of investments come with different tax treatments, and reviewing them now could help you maximize your tax efficiency.
Key considerations:
- Real estate: If you’ve sold property, you may be subject to capital gains tax. However, you could defer those taxes through a 1031 exchange, where you reinvest the proceeds into another qualifying property.
- Partnership interests: The sale of partnership interests often triggers capital gains tax, but understanding how your share of profits and losses are taxed can help you plan for these events.
- Stock options or investments: If you have significant stock investments, consider whether holding or selling before year-end will benefit you more based on current market conditions and your overall income.
Pro Tip: Make sure you’re working with a tax professional who understands the nuances of investment taxation, especially when it comes to complex assets like real estate and partnerships.
5. Plan Ahead for Asset Sales in 2025 and Beyond for Better Tax Positioning
Even though you’re focused on 2024 year-end tax moves, it’s never too early to start thinking about how future asset sales could impact your taxes in 2025 and beyond. If you’re anticipating a large gain from selling property, investments, or other assets next year, now is the time to start planning.
Steps to take now:
- Consider deferring the sale: If your income for 2024 is high, but you expect a lower-income year in 2025, consider deferring the sale of assets to take advantage of a lower tax bracket next year.
- Installment sales: If you’re planning a significant asset sale, such as real estate, consider using an installment sale to spread the income over multiple years, thereby reducing your annual tax burden.
- Plan for charitable giving: If you plan to donate to charity in the future, you could donate appreciated assets instead of cash to reduce capital gains and get a charitable deduction.
Pro Tip: Planning ahead for future asset sales allows you to structure the sale in a way that minimizes taxes and maximizes your financial benefit.
Why Year-End Capital Gains Tax Moves Matter for Lawyers
Capital gains taxes can feel like a hidden drain on your finances, but with the right strategies, you can significantly reduce your liability. By focusing on timing asset sales, taking advantage of tax-loss harvesting, and exploring tax-saving options like qualified opportunity zones, you can keep more of your wealth working for you.
As a lawyer, your time is valuable, but so is your financial health. By implementing these strategies before December 31, you can reduce your tax bill for this year and position yourself for future success.
Don’t Let Capital Gains Eat Your Profits—Get Expert Tax Help Today!
At Prestige Accounting and Consulting, we specialize in helping lawyers and law firms manage capital gains and develop tailored tax strategies to minimize their liability. Whether you need help with timing asset sales, tax-loss harvesting, or planning for future investments, our team is here to provide expert guidance.
Contact us today to schedule a consultation and ensure your capital gains are managed with precision before the year ends.
