How to Lessen Your Capital Gains Tax
Aside from paying income tax and payroll tax, individuals who buy and sell personal and investment assets should also deal with the capital gains tax system. Capital gain rates may be equally 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 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. Depending on your tax rate, you may save from 10% to 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 shorter than one year, you’ll pay 28% of $2,000, which is $560, on the transaction.
Sell when you’re receiving a 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.
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 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. 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. 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.
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