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 are usually as 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 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 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 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 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 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.
Because your capital gain tax rate is dependent on your taxable income, general tax-savings tricks can help you grab a favorable 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.
Also look for vague or not-so-known deductions, like the moving expense deduction for those who have to move for a job. Pick bonds issued by states, local governments, or municipalities – whose income is non-taxable – over corporate bonds. 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. To lower your tax, use up your capital losses in the years you have capital gains. 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.