Are there hidden tax benefits in your brokerage account?

Many people are taxing their brains this month as the IRS filing deadline approaches. And if you’re dissatisfied with the results of your return as you find out you’ll owe the IRS a lot of money in 2023, you might want to do what you can to save more money in 2024. .

But one thing you might want to do is use a brokerage account. There may be hidden tax breaks.

Are there opportunities to lower your taxes?

There is no tax deduction for donating money to a brokerage account. Likewise, you’ll pay capital gains taxes each year on your brokerage account profits. Rather, the tax breaks you can get from a brokerage account may come in the form of a no-frills investment.

Sometimes even the most seasoned investors choose assets that don’t perform well. So, if you have stocks or assets in your brokerage account that are consistently losing value and are currently trending downward, you have options. You can leave those assets in your portfolio and hope for the best. Or, you could sell it at a loss and use that loss to improve your tax situation.

Capital losses (such as selling stock for less than you paid) can be used to offset capital gains. Let’s say you sold stocks in your brokerage account last month for a profit of $4,000, but the stocks are now worth $4,000 less than when you first bought them. If you sell those shares, you cancel that gain and don’t have to pay IRS taxes on that $4,000.

Additionally, if you have no capital gains to cancel, the IRS allows you to use up to $3,000 of your capital losses per tax year to offset ordinary income. Let’s say you get a $3,000 raise in early 2024, but you don’t adjust your withholdings to deduct more taxes from your paycheck. What can happen is that you’ll have to pay taxes to the IRS again in 2025.

However, if you lost $4,000 in your brokerage account, you could use $3,000 of that to offset the increase. You can then use the remaining $1,000 of your loss to your advantage by carrying it over to the next tax year.

Strategic tax moves that can succeed

Clearly, your goal in constructing an investment portfolio is to make money on the assets you own, not lose money. However, if you have stocks or assets that have not yet been liquidated, you should know that formalizing those losses could benefit you tax-wise.

In fact, even if you have certain stocks in your portfolio that are down but have the potential to recover, you might consider selling some of them if you have a lot of capital gains to offset. However, it is a good idea to consult a financial advisor or tax professional to guide you through the process and help you understand the rules. That way, you won’t make mistakes that prevent you from achieving your intended purpose.

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