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Reducing 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 techniques to drive them down.

The following are useful tips that help you minimize 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 shorter than one year, you’ll pay 28% of $2,000, which is $560, 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. Those within the 10% and 15% brackets need not even pay long-term capital gains tax at all. If your income level is about to drop – let’s say your spouse is almost retiring or you’re about to lose your job – selling during this low income year will decrease your capital gains tax rate.

Limit 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.

Also look for vague or not-so-known deductions, like the moving expense deduction for those who have to move for a job. Rather than buying corporate bonds, get bonds issued by municipalities, local governments and states, as the income they produce 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, time 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. Using up your capital losses in the years you have capital gains, will lessen 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 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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