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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 are usually as high as regular income taxes. The good news is there are ways to keep them as low as possible.

Here are handy tips to help you reduce your capital gains tax:

Wait at least one year before selling.

For capital gains to qualify for long-term status (and a tax rate cut), wait for at least one calendar year before you sell your property. You could save, depending on your tax rate, between 10% and 20%. If you sell stock with a $2,000 capital gain, for instance, and you are in the 28% income tax bracket and have owned the stock for longer than a year, you need to pay 15% on the transaction. 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 earning 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.

As your capital gain tax rate depends on your taxable income, general tax-savings methods can help you grab a nice 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.

Also look for vague or not-so-known deductions, like the moving expense deduction for those who have to move for a job. Rather than buying corporate bonds, get bonds issued by municipalities, local governments and states, as the income they produce is non-taxable. There’s an entire range of possible tax breaks, so study the IRS’s Credits & Deductions database so you know what you can qualify for.

When possible, sync 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. If you use up your capital losses during the years you have capital gains, you can reduce 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. You can carry additional capital losses into future tax years, however, although it may take a while before you can use those up if you’ve absorbed a substantial loss.