How to Lessen Your Capital Gains Tax
On top of paying income tax and payroll tax, people buying and selling personal and investment assets also need to deal with the capital gains tax system. Capital gain rates may be equally high as regular income taxes. The good news is there are ways to keep them as low as possible.
Here are handy tips to help you reduce 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 save from 10% to 20%. If you sell stock with a $2,000 capital gain, for instance, and you are in the 28% income tax bracket and have owned the stock for longer than a year, you need to pay 15% on the transaction. 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 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 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.
Lower 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. 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. 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 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 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.