The Ultimate Guide to Taxes

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 techniques to drive them down.

The following are useful tips that help you minimize your capital gains tax:

Wait at least one year 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 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 earning low income.

Your income level changes the amount of long-term capital gains tax you have 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.

Limit 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. 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 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 important feature of capital gains is that they’re diminished by any capital losses you incur within a specific year. To lower your tax, use up your capital losses in the years you have capital gains. 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. 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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