Tips for Decreasing 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 are usually as high as regular income taxes. The good news is there are strategies to bring them lower.
Here are handy tips to help you reduce your capital gains tax:
Wait at least 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%. If you sell stock with a $2,000 capital gain, for instance, and you are in the 28% income tax bracket and have owned the stock for longer than a year, you need to pay 15% 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. Taxpayers within the 10% and 15% brackets don’t even have to 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.
Bring down your taxable income.
Since your capital gain tax rate relies on your taxable income, general tax-savings techniques can help you get a good rate. Maximize your deductions, for example, by completing expensive medical procedures before yearend, donating to charity, or maximizing your traditional IRA or 401k contributions.
Also look for vague or not-so-known deductions, like the moving expense deduction for those who have to move for a job. 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 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 restriction on how much in capital gains you should report, but you can only take $3,000 of net capital losses for every tax year. You can, however, carry extra capital losses into future tax years, but if you’ve had a particularly substantial loss, it may take a while for you to use those up.
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