Reducing 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.
The following are useful tips that help you minimize 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. You could save, depending on your tax rate, between 10% and 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 hardly 12 month, you’ll pay $560 or 28% of $2,000 in taxes on the transaction.
Sell when you’re earning low income.
Your income level influences the amount of long-term capital gains tax you need 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.
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.
When possible, sync your capital losses with your capital gains.
One remarkable feature of capital gains is that they’re moderated by any capital losses incurred on a particular year. Using up your capital losses in the years you have capital gains, will lessen 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 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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