Tips for Decreasing 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 are usually as 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 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 be able to save 10% to 20%. For instance, if you sell stock leading to a capital gain of $2,000, and you fall under the 28% income tax bracket and have held the stock for over 12 months, you are to pay 15% of $2,000, which is $300. 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 receiving a 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 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. Increase your deductions, for instance, by giving to charity, getting pricey medical procedures before the year closes, or increasing 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. Rather than buying corporate bonds, get bonds issued by municipalities, local governments and states, as the income they produce 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.
When possible, sync your capital losses with your capital gains.
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 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. 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.
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