Reducing Your Capital Gains Tax
Besides paying income tax and payroll tax, persons who buy and sell personal and investment assets also have to work with the capital gains tax system. Capital gain rates may be equally high 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 one year before selling.
To qualify capital gains for long-term status (and a tax rate cut), wait until a calendar year has passed before you sell your property. Depending on your tax rate, you may be able to save 10% to 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 hardly 12 month, you’ll pay $560 or 28% of $2,000 in taxes on the transaction.
Sell when you’re receiving a low income.
Your income level changes the amount of long-term capital gains tax you have 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 for little-known deductions as well, such as the moving expense deduction, which you get when you move for a certain job. Pick bonds issued by states, local governments, or municipalities – whose income is non-taxable – over corporate bonds. There’s a whole bunch of potential tax breaks, so take time to check the IRS’s Credits & Deductions database to know which ones you may be qualified for.
When possible, sync your capital losses with your capital gains.
One prominent feature of capital gains is that they’re lessened by any capital losses you incur on a certain year. Using up your capital losses in the years you have capital gains, will lessen your tax. There’s no cap on the amount of capital gains you can report, but you may only take $3,000 of net capital losses every tax year. 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.
Recommended reference: view it