How to Lessen 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 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.
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 save from 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. 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 expected to go down- for instance, if your spouse is about to be unemployed or if you’re nearing retirement – sell within this low income year and cut 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. Increase your deductions, for instance, by giving to charity, getting pricey medical procedures before the year closes, or increasing your traditional IRA or 401k contributions.
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 important feature of capital gains is that they’re diminished by any capital losses you incur within a specific year. To lower your tax, use up your capital losses in the years you have capital gains. 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. 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.