You May Be Able To Pay 0% In Capital Gains Taxes — Legally

In the financial game, capital gains tax can feel like a persistent hurdle, chipping away at your investment returns year after year. But there’s good news: With a bit of know-how and some smart planning, you can minimize its bite. 

Capital gains tax is essentially a tax on the profit earned from selling assets like stocks, bonds, and real estate. While it can pose a substantial cost for investors, there are legitimate methods to reduce or avoid this tax altogether.

How Is Capital Gains Tax Calculated

If you sell an asset for more than you paid for it, you have a capital gain. If you sell an asset for less than you paid for it, you have a capital loss.

The amount of capital gains tax you owe depends on a few factors, including your income, the length of time you held the asset and the type of asset you sold. Short-term capital gains, which are gains on assets held for one year or less, are taxed at your ordinary income tax rate. Long-term capital gains, which are gains on assets held for more than one year, are taxed at a lower rate.

The tax rates for long-term capital gains depend on your income. For example, in 2023, if your taxable income is less than $44,625 as a single filer ($89,250 for married, filing jointly), your long-term capital gains tax rate is 0%. If your taxable income is between $44,625 and $445,850 as a single filer ($89,250 and $891,700 for married, filing jointly), your long-term capital gains tax rate is 15%. If your taxable income is over $445,850 as a single filer ($891,700 for married, filing jointly), your long-term capital gains tax rate is 20%.

It is important to note that there are ways to legally reduce or avoid capital gains tax, such as investing in tax-advantaged accounts or realizing gains in years when you fall within the income brackets that are taxed at 0%. It is recommended to consult with a financial adviser before making any investment decisions or tax planning strategies.

Trending: Got This Much in the Bank? It Turns Out, You Could Be Happier With A Financial Adviser

Legal Strategies To Avoid Capital Gains Tax

When it comes to investing, capital gains tax can eat into your profits. Here are a few options to consider:

Hold Investments Longer

One of the simplest ways to avoid capital gains tax is to hold onto your investments for a longer period. If you sell an investment that you’ve held for more than a year, you’ll qualify for long-term capital gains tax rates, which are typically lower than short-term rates. By holding onto your investments for longer, you can reduce your tax bill and potentially increase your overall returns.

Use Tax-Advantaged Retirement Accounts

Another way to avoid capital gains tax is to invest in tax-advantaged retirement accounts, such as a 401(k) or an individual retirement account (IRA). These accounts allow you to defer taxes on your investment gains until you withdraw the money in retirement, at which point you may be in a lower tax bracket. By investing in these accounts, you can maximize your tax savings and potentially grow your retirement savings faster.

Gifts And Inheritances

If you receive an investment as a gift or inheritance, you may be able to avoid capital gains tax altogether. When you receive a gift, the cost basis of the investment is the same as the cost basis of the person who gave it to you. If you sell the investment, you’ll only owe capital gains tax on the difference between the sale price and the cost basis. In the case of an inheritance, the cost basis is typically the fair market value of the investment on the date of the original owner’s death.

1031 Exchange

A 1031 exchange is a tax-deferred exchange of one investment property for another. By using a 1031 exchange, you can defer paying capital gains tax on the sale of your original property, as long as you reinvest the proceeds into a new property. This strategy can be particularly useful for real estate investors who want to avoid paying capital gains tax when they sell a property.

Avoiding capital gains taxes legally is not just about knowing the rules; it’s about strategically applying them to your financial situation. It requires a nuanced understanding of tax laws and investment strategies, which can be complex and ever-changing. This is where the expertise of a financial adviser becomes invaluable.

Financial advisers possess the knowledge and experience to navigate the intricacies of tax legislation. They can provide personalized advice tailored to your financial situation, helping you make informed decisions about your investments. Whether it’s identifying the right moments to realize gains, understanding the nuances of tax-advantaged accounts or exploring unique investment opportunities like 1031 exchanges in real estate, a financial adviser can guide you through each step.

Read Next: How Much Cash Can I Expect To Get Each Month From A $100,000 Annuity?