Reducing Your Capital Gains Tax
Aside from paying income tax and payroll tax, individuals who buy and sell personal and investment assets should also deal with the capital gains tax system. Capital gain rates can be about as much as regular income taxes. The good news is there are strategies to bring them lower.
Below are helpful tips for minimizing your capital gains tax:
Wait at least one year before selling.
For capital gains to qualify for long-term status (and a tax rate cut), wait for at least one calendar year before you sell your property. Depending on your tax rate, you may save from 10% to 20%. For instance, if you sell stock leading to a capital gain of $2,000, and you fall under the 28% income tax bracket and have held the stock for over 12 months, you are to pay 15% of $2,000, which is $300. If you’ve held the stock for shorter than one year, you’ll pay 28% of $2,000, which is $560, on the transaction.
Sell when you’re receiving a low income.
Your income level affects the amount of long-term capital gains tax you are obliged to pay. Those within the 10% and 15% brackets need not even pay long-term capital gains tax at all. If your income level is about to drop – let’s say your spouse is almost retiring or you’re about to lose your job – selling during this low income year will decrease your capital gains tax rate.
Lower your taxable income.
Because your capital gain tax rate is dependent on your taxable income, general tax-savings tricks can help you grab a favorable rate. For example, increase your deductions by donating to charity, contributing more to your traditional IRA or 401k, or completing expensive medical procedures before the end of the year.
Look as well for not-so-known deductions, like the moving expense deduction, which is for those who need to move for employment. Rather than buying corporate bonds, get bonds issued by municipalities, local governments and states, as the income they produce is non-taxable. There’s a whole range of potential tax breaks out there, so refer to the IRS’s Credits & Deductions database to know what you may qualify for.
Time your capital losses with your capital gains if possible.
One remarkable feature of capital gains is that they’re moderated by any capital losses incurred on a particular year. If you use up your capital losses during the years you have capital gains, you can reduce your tax. There’s no ceiling on the amount of capital gains you have to report, for each tax year, you are only allowed to take net capital losses worth $3,000. You can carry additional capital losses into future tax years, however, although it may take a while before you can use those up if you’ve absorbed a substantial loss.
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