Capital Gains Tax – How to Help Avoid or Reduce Capital Gains Tax

In This Video:

Do you have non-retirement asset(s) that have appreciated in value?  Maybe stocks? Property?  A Business?  Well, don’t forget you might owe the IRS on your appreciation, or gains, when you sell the asset.  The Capital Gains Tax.  With planning, you may be able to reduce or eliminate this tax and keep more of your gains in your pocket.

Things To Consider:

When you make an investment, your goal is for a gain, right?  These assets could be stocks, mutual funds or ETFs in a brokerage account.  Maybe a home, investment property or a business.  Or other tangible items like a car or boat.  You may have one or several assets that you own outside of your retirement accounts (401ks, IRAs, etc.). Depending on what you purchased and when, it is quite possible that your investment may go up in value. That’s great! So you sell decide to sell the asset to capture the gains and put that money in your pocket.  Still sounds great, right?

Well, don’t forget, you might owe the IRS a portion of your gains.  The tax on these gains is called the Capital Gains Tax.  Depending on when you sell can impact how much you pay in tax.  With proper planning, you may be able to reduce or eliminate the tax and keep more of your gain.

When an asset that has appreciated in value from its original purchase price is sold, the difference between the selling price and purchase price becomes your ‘Realized’ gains.  As an example, let’s say you purchased a stock at $75 / share and it’s current value is $100 / share.  If you were to sell the stock, you would have $25 / share in ‘Realized’ gains.

Based on when you sold, and your overall taxable income, will determine how much you owe in Capital Gains Tax.  From a tax perspective, these ‘Realized’ gains will be recognized the year you sold the asset and will be classified as short-term gains or long-term gains.  That’s where the potential tax savings can come into play.

Short-term gains are gains on an asset that was held and sold in 1 year or less.  The tax on these gains would be at your ordinary income tax rate.

Long-term gains are gains on an asset that was held for more than 1 year before it was sold.  The tax on these gains is at a more favorable rate of 0%, 15% or 20%.  The rate you will be taxed at all depends on your taxable income for the year.  In addition, high earners could be subject to an additional 3.8% tax, the Net Investment Income tax.  Also, collectibles (coins, precious metals, stamp collections, fine art, antiques) are at a straight 28% tax on the gains.

How do you reduce or potentially avoid the Capital Gains Tax?  In this video, I review 5 strategies that we go through with our clients that you may want to consider

  1. Be patient and hold on for at least 1 year.
  2. Make your property your primary residence for 2 of the 5 years before you sell.
  3. Use tax-advantaged accounts.
  4. Use tax-efficient funds.
  5. Timing.

When working with our clients, tax planning plays a key role in the overall plan. Utilizing these strategies and others may help keep more of your gains and hard-earned money in your pocket.