December 30, 2016
How to Lessen 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 may be equally high as regular income taxes. The good news is there are ways to keep them as low as possible.
The following are useful tips that help you minimize 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. You could save, depending on your tax rate, between 10% and 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 affects the amount of long-term capital gains tax you are obliged 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 going down -your spouse is about to go jobless, for example, or you’re almost retiring – sell during a low income year to reduce 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. 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 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, time 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 ceiling on the amount of capital gains you have to report, for each tax year, you are only allowed to take net capital losses worth $3,000. 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.