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How to Lessen Your Capital Gains Tax

Aside from paying income tax and payroll tax, individuals who buy and sell personal and investment assets should also deal with the capital gains tax system. Capital gain rates can be about as much 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 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 changes the amount of long-term capital gains tax you have to pay. Taxpayers within the 10% and 15% brackets don’t even have to 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.

Because your capital gain tax rate is dependent on your taxable income, general tax-savings tricks can help you grab a favorable 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. 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, 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. Using up your capital losses in the years you have capital gains, will lessen your tax. 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, however, carry extra capital losses into future tax years, but if you’ve had a particularly substantial loss, it may take a while for you to use those up.