Capital gains taxes can take a significant bite out of your investment portfolio if you’re not aware of their impact. It’s essential to understand how they work and how to reduce your capital gains tax liability. In this post, we will discuss various strategies that can help you lower your capital gains tax and make the most of your investment earnings.
- Hold Your Assets for Over a Year
One of the simplest ways to reduce your capital gains tax liability is to hold your assets for over a year before selling them. The IRS offers a lower tax rate, known as the long-term capital gains rate, for those who hold their assets for more than a year. The long-term capital gains tax rates range from 0% to 20% based on your income level, and it is significantly lower than the short-term capital gains rate, which can be as high as 37%.
- Take Advantage of Tax-Advantaged Accounts
Tax-advantaged accounts such as retirement accounts (401(k), IRA, etc.) and Health Savings Account (HSA) offer beneficial tax treatment when saving for long-term goals. Often, these accounts can help in reducing your taxable income, and you can earn investment returns without paying taxes until you withdraw funds. By utilizing these accounts, you can help reduce your overall capital gains tax liability.
- Gift Assets to Family Members
One of the lesser-known strategies to potentially reduce your capital gains tax liability is to gift assets to family members. Through the gift tax exemption, you can gift up to a specified amount (currently $15,000) per recipient without paying taxes. If the recipient sells the asset, capital gains tax will apply, but it will be based on the lower original cost basis. However, before implementing this strategy, it’s best to talk to your tax planner to ensure you comply with IRS rules.
- Charitable Donations
Lastly, making charitable donations can sometimes be a tax-efficient way to reduce your capital gains tax liability. Through donation, you can both receive a tax deduction and eliminate the capital gains tax due. Donating appreciated assets, such as stocks, directly to non-profit organizations allows to eliminate the capital gains on these assets.
Reducing your capital gains tax liability involves developing an investment strategy that utilizes various techniques to avoid potential tax liability. The strategies mentioned above may not be suitable for everyone, and it’s best to seek the guidance of an experienced tax planner. However, by being strategic, you can help minimize your tax burden and maximize your investment returns. Remember, taxes are only part of the equation; it’s essential to focus on long-term investment goals as well.
If you want additional information on reducing your tax liability, call Taxcite today at 530-203-5605 for a free financial consultation.