Tips for Decreasing 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 are usually as high 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.
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. Depending on your tax rate, you may be able to save 10% to 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 held the stock for hardly 12 month, you’ll pay $560 or 28% of $2,000 in taxes 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. Those within the 10% and 15% brackets need not even pay 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 as well for not-so-known deductions, like the moving expense deduction, which is for those who need to move for employment. 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, time your capital losses with your capital gains.
One prominent feature of capital gains is that they’re lessened by any capital losses you incur on a certain 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.