Tips for Decreasing 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 may be equally 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 be qualified for long-term status (and less tax), wait a year before you sell the property. Depending on your tax rate, you may be able to save 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.
Lower 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. Maximize your deductions, for example, by completing expensive medical procedures before yearend, donating to charity, or maximizing 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. Rather than buying corporate bonds, get bonds issued by municipalities, local governments and states, as the income they produce 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.
Time your capital losses with your capital gains if possible.
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 cap on the amount of capital gains you can report, but you may only take $3,000 of net capital losses 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.