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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.

Below are helpful tips for minimizing your capital gains tax:

Wait at least 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 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 owned the stock for barely a year, you’ll pay $560, which is 28% of $2,000, on the transaction.

Sell when you’re receiving a 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 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. Maximize your deductions, for example, by completing expensive medical procedures before yearend, donating to charity, or maximizing your traditional IRA or 401k contributions.

Look for little-known deductions as well, such as the moving expense deduction, which you get when you move for a certain job. Pick bonds issued by states, local governments, or municipalities – whose income is non-taxable – over corporate bonds. 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, time 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 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.

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