Taxes are one of two certainties in life. Just because they’re inevitable, that doesn’t mean taxpayers can’t limit how much they pay the government. Capital gains taxes can significantly erode yearly earnings, but it’s possible to reduce or eliminate them. Here, we’ll offer some information on capital gains taxes, as well as some tax avoidance strategies and implementation tips.
What’s the Capital Gains Tax All About?
When people own real estate, stocks, land, businesses, and other assets and sell them for a profit, they’ve achieved capital gains. The government will want their share of the proceeds, which is known as the capital gains tax. Depending on the classification of gains and your yearly taxable income, the rate may vary.
Avoiding Capital Gains
No one wants to hand over a significant portion of their profits to the government. Fortunately, there are several ways to reduce the amount of taxes paid after selling assets, and we’ll go over them in the sections below.
Invest in Opportunity Zones
Since the Tax Cuts and Jobs Act was established in 2017, qualified opportunity zone funds near me have given investors an incentive to work in distressed communities. By investing in underserved areas, you can potentially reduce or eliminate capital gains taxes. These savings are only available, however, when an investment is retained for the required timeframe.
Select Long-Range Investments
A capital gain may be short- or long-term, and each type has a different tax rate. Any asset held for a year or less is classed as short-term. These gains are taxed at the ordinary rate, which may be up to 37%, depending on your taxable income. To avoid that big hit, pick long-term investments when possible.
Start a Tax-Deferred Retirement Plan
For some investors, most assets and savings are tied up in retirement accounts. It’s best to optimize these accounts to the extent possible by using tax-exempt and tax-deferred plans to eliminate capital gains taxes. When contributing to traditional IRAs, 401(k)s, and other tax-deferred plans, you’ll get a deduction on all contributions made during the tax year.
With this tax elimination strategy, you’ll save now and in the future. Money put into retirement accounts will also grow with time. When you’re ready to make a withdrawal, account growth is taxed at the ordinary rate instead of being assessed a capital gains tax.
Those holding a range of assets can sometimes offset some gains with losses, thereby reducing or eliminating the capital gains tax. For example, if an investment decreases in value by $5000, but another one is up by $4000, selling both assets would reduce capital gains. You’d only pay the tax on the difference, or $1000, instead of the full $5000 gain on the first investment.
Keep More of Your Hard-Earned Money
Reducing or eliminating capital gains taxes paid on certain assets will help you give less money to the government—and keep more of it in your own pocket. The capital gains tax may range from 0% to 28%, depending on the asset class, your income, and other factors. Tax-deferred retirement accounts, offsets, patience, and long-term investments are all effective ways to reduce or eliminate capital gains taxes. While taxes are an inevitable part of life in America, paying too much isn’t. By following these strategies, investors can reduce tax liabilities and save more of what they’ve worked for.