Reducing 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 may be equally 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 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 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 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 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.
Because your capital gain tax rate is dependent on your taxable income, general tax-savings tricks can help you grab a favorable rate. Maximize your deductions, for example, by completing expensive medical procedures before yearend, donating to charity, or maximizing your traditional IRA or 401k contributions.
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 bunch of potential tax breaks, so take time to check the IRS’s Credits & Deductions database to know which ones you may be qualified 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 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. You can carry additional capital losses into future tax years, however, although it may take a while before you can use those up if you’ve absorbed a substantial loss.