8 Lessons Learned: Resources

How to Lessen 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.

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

Wait 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%. 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 owned the stock for barely a year, you’ll pay $560, which is 28% of $2,000, 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. 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 going down -your spouse is about to go jobless, for example, or you’re almost retiring – sell during a low income year to reduce 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. 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.

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.

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 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.