Learn How to Offset Your Capital Gains. - Tax Professionals Member Article By James Financial Services Inc
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Learn How to Offset Your Capital Gains.

Learn How to Offset Your Capital Gains.

When you earn from selling an asset, such as a business, land, or stock, you may be subject to capital gains tax. Capital gains can be taxed at the same rate as ordinary income, up to 37% or up to 0%, depending on the tax category. However, there are techniques that investors use to offset capital gains tax.


How will capital gains and losses affect me?

You probably know you can offset your losses with capital gains to reduce your net taxable income. You know that long-term losses can offset your regular income by up to $3,000 once you no longer have capital gains to absorb those losses.

You may also know that before the end of the year, you can select investments to sell at a loss ("tax-loss harvesting") to offset your gains elsewhere in your portfolio. In the long run, you know that this approach affects your portfolio, so selling certain investments at a loss just to reduce taxes can wreak havoc on your portfolio allocation.

And you should consider getting information from an investment advisor and a tax professional before doing something unpleasant!

Here are some strategies that can help offset the tax burden on capital gains.


Wait more than a year before selling.

When an asset is held for more than one year before being sold, it qualifies for long-term status, decreasing the capital gains tax rate. Short-term gains are taxed at normal income rates, while long-term capital gains are taxed at 0%, 15%, or 20%, depending on the tax category. Because long-term capital gains are normally taxed at a more favorable rate, it is recommended that you hold assets for at least one year before you sell them.


Tax-Loss Harvesting

You can offset capital gains by losses incurred during the fiscal year or by carrying them back from a previous year through a strategy known as tax-loss harvesting. Investors can reduce the tax consequences by selling securities at a loss using tax-loss harvesting. If the losses exceed the gains, taxpayers can use up to $3,000 a year to offset regular income with income tax.

For example, suppose you earned $10,000 with asset A, but asset B lost $2,000. If you sell asset B at a loss, you can offset the gains from asset A and pay $8,000 in tax instead of $ 10,000 in total. If the loss on B was greater than the gain on A, you can offset the entire gain and deduct $3,000 from taxable income.


Defer capital gains with a 1031 Exchange 

An exchange 1031 allows investors to sell a real estate investment and transfer the proceeds from their sale to a replacement property of the same type. By making a 1031 exchange, investors defer the capital gains tax indefinitely as long as they continue to reinvest the capital in the property. Property can be swapped until death, and beneficiaries can receive a single base increase, thereby eliminating capital gains tax. The regulations for a successful 1031 exchange are complex and follow a strict schedule. 1031 exchange also requires the help of a qualified broker.


Reduce Taxable Income

Reducing taxable income is an awesome way to potentially reduce the tax rate on short-term capital gains, as it is income-based. You can take full advantage of deductions and credits before filing taxes or making contributions to a traditional IRA or 401(k). There are numerous ways to lower your taxable income, such as investing in municipal bonds. Interest on most municipal bonds is exempt from federal taxes and some state taxes. The Internal Revenue provides a database of credits and deductions for individuals to obtain more credits and deductions to reduce taxable income.


Sell when income is lower.

If you or your spouse have recently resigned, lost their job, or are about to retire, selling in a low-income year can put you in a lower tax bracket. You can lower the tax rate on your capital gains by entering into a lower tax category.


Bottom Line

Everyone can offset capital gains taxes. By knowing the perfect strategy for you, most taxpayers have the potential to save. Consult a tax professional to make sure you qualify for certain deductions.


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