5 Tips For Minimizing Your Capital Gains Tax

As we’ve previously discussed, the capital gains tax is a tax on the profits a person makes when they sell an asset. So if you bought stock that grew in value, you pay a capital gains tax on the difference when you sell the stock. If you bought a piece of land at a certain price and later sold it at a higher price, the money you made from that sale is taxed.

The capital gains tax is one of the most infamous taxes out there, and people are constantly searching for ways to avoid it. Below are some of the common strategies used to minimize the capital gains tax. Please keep in mind that this blog is meant for informative purposes and is not meant to be used as financial or legal advice for your specific situation.

1. Realize Losses

Capital losses can be used to offset your capital gains and thus lower the amount you are taxed on your capital gains. A capital loss is when an asset loses value and you realize that loss by selling the asset. An added bonus of realizing the loss is that $3000 of capital losses in excess of your capital gains can be used to offset your regular income each year, and any more than that can be carried over indefinitely to be used in subsequent tax years.

2. Traditional IRAs and 401(k)s

Funneling your capital gains into a traditional retirement account will allow you to defer the taxes on those capital gains until you begin to draw on them in retirement. Thus, your taxable income for the current year will be lowered. Additionally, if you are in a higher tax bracket now, you may be in a lower tax bracket when you begin to draw on the retirement account meaning you will pay less capital gains tax overall. Just be aware of yearly contribution limits for your retirement accounts.

3. Roth IRAs and 401(k)s

While traditional retirement accounts like those above are tax-deferred, Roth accounts are tax-exempt. You’ll pay tax on the Roth account deposit, but then the capital gains can grow tax free and will not be taxed when you withdraw from the account. Once again, be aware of contribution limits.

4. Hold on To Stocks and Avoid Short-Term Investments

You will not pay a capital gains tax on stock growth until the gains are realized by selling your stocks. If you want to minimize your capital gains tax in a given year, hold off on selling your profitable stocks. Gains from short-term investment strategies (i.e., held for less than a year) are subject to your ordinary tax rates which are generally higher than gains from long-term strategies (i.e., held for more than a year).

5. Primary Residence Exclusion

Tax law provides for an exclusion of up to $250,000 on capital gains from the sale of an individual’s primary residence, and double that for married couples. So if you sell your primary home for a profit, you’ll only pay capital gains on any profit above those amounts. Real estate investors can utilize this exclusion to their benefit by buying a home and making it their primary residence while they renovate and improve it, then flipping it for a capital gains tax-free profit if the profit is within the aforementioned limits.

Remember, this is not an exhaustive list of possible strategies. Everyone’s situation is unique and there are many ways to manage your wealth and minimize your capital gains taxes, amongst other taxes. Give me a call to discuss what I can do to help with your specific tax situation.

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Written by Desnoyers CPA

Desnoyers CPA

Known for her friendly, outgoing nature and her rare talent for financial foresight, Lydia Desnoyers has been serving individuals and small businesses in Florida since 2010. After earning her Master’s Degree in Accounting from Nova Southeastern University and her Bachelor’s Degree in Accounting from Florida State University, she became a Certified Public Accountant and a Certified Fraud Examiner.