News For This Month: Experts

Reducing 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 can be about as much 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 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. You could save, depending on your tax rate, between 10% and 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 affects the amount of long-term capital gains tax you are obliged to pay. Taxpayers within the 10% and 15% brackets don’t even have to 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.

Limit 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. 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 for little-known deductions as well, such as the moving expense deduction, which you get when you move for a certain job. Instead of buying corporate bonds, go for government-issued bonds (states, local or municipal), income from which is non-taxable. There’s an entire range of possible tax breaks, so study the IRS’s Credits & Deductions database so you know what you can qualify for.

Time your capital losses with your capital gains if possible.

One prominent feature of capital gains is that they’re lessened by any capital losses you incur on a certain year. If you use up your capital losses during the years you have capital gains, you can reduce 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. You can, however, carry extra capital losses into future tax years, but if you’ve had a particularly substantial loss, it may take a while for you to use those up.

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