How to Lessen Your Capital Gains Tax
On top of paying income tax and payroll tax, people buying and selling personal and investment assets also need to 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 ways to keep them as low as possible.
The following are useful tips that help you minimize your capital gains tax:
Wait a year (at least) 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. You could save, depending on your tax rate, between 10% and 20%. For instance, if you sell stock where the capital gain is $2,000, belong to the 28% income tax bracket, and have held the stock for over a year, you’ll have to pay 15% of $2,000 on the transaction. 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 your earnings are low.
Your income level influences the amount of long-term capital gains tax you need to pay. Individuals falling under the 10% and 15% brackets don’t even need to pay any 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.
Limit 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. Instead of buying corporate bonds, go for government-issued bonds (states, local or municipal), income from which 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 important feature of capital gains is that they’re diminished by any capital losses you incur within a specific 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. However, you may carry additional capital losses into future tax years, although it may take some time to use those up if you’ve had a particularly big loss.
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