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 are usually as high as regular income taxes. The good news is there are techniques to drive them down.
The following are useful tips that help you minimize your capital gains tax:
Wait a year (at least) before selling.
For capital gains to be qualified for long-term status (and less tax), wait a year before you sell the property. You could save, depending on your tax rate, between 10% and 20%. For instance, if you sell stock leading to a capital gain of $2,000, and you fall under the 28% income tax bracket and have held the stock for over 12 months, you are to pay 15% of $2,000, which is $300. If you’ve owned the stock for barely a year, you’ll pay $560, which is 28% of $2,000, 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. 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.
Lower your taxable income.
As your capital gain tax rate depends on your taxable income, general tax-savings methods can help you grab a nice 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. Instead of buying corporate bonds, go for government-issued bonds (states, local or municipal), income from which is non-taxable. There’s an entire range of possible tax breaks, so study the IRS’s Credits & Deductions database so you know what you can 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. To lower your tax, use up your capital losses in the years you have capital gains. 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. 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.