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How to Lessen 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 are usually as high as regular income taxes. The good news is there are strategies to bring them lower.

Below are helpful tips for minimizing your capital gains tax:

Wait a year (at least) 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 shorter than one year, you’ll pay 28% of $2,000, which is $560, on the transaction.

Sell when you’re earning low income.

Your income level affects the amount of long-term capital gains tax you are obliged 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.

Limit 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.

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 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.

When possible, sync your capital losses with your capital gains.

One important feature of capital gains is that they’re diminished by any capital losses you incur within a specific 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. However, you may carry additional capital losses into future tax years, although it may take some time to use those up if you’ve had a particularly big loss.

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