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How can I reduce my capital gains tax bill?

On Behalf of | Oct 26, 2021 | Tax Debt |

Anyone who makes a profit on the sale of an asset can expect Uncle Sam is watching and waiting for his slice of the pie. When this profit is the result of an investment, the Internal Revenue Service (IRS) will generally expect the individual who made the profit pay a tax on those gains.

This tax is referred to as the capital gains tax and applies on sales of various items like stocks, business interests, and real estate.

How much is a capital gains tax bill?

The amount the IRS expects will vary depending on the individual’s tax bracket and how long the individual owned the asset before selling and making a profit. If owned less than a year, short-term capital gains taxes generally apply. The IRS often taxes these profits at the same rate as the individual’s ordinary income.

If you owned the asset for longer than a year, long-term capital gains taxes apply. This can range from 0%, 15%, or 20%.

How can I reduce this bill?

The most obvious is to avoid selling the item. If you keep it, you do not need to pay the bill. You could look into estate planning options to then transfer the asset to future generations and further mitigate the tax bill associated with that specific asset. In most cases, the asset is transferred to your heirs at the fair market value on the date of your death. They could then sell the asset without having to pay the tax bill associated with the profit gained on that asset during your lifetime.

Another option involves smart, tax minded investment strategies. This includes looking for losses in your investment portfolio, as you can often take these losses and use them to offset the gains.

Is there anything else I should know about capital gains taxes?

A word of caution: like all things in the tax world, these rates could change. President Joseph Biden’s 2022 Tax Plan includes strategies that will directly impact capital gains taxes. The American Families Plan would tax capital gains as ordinary income for those with an income above $1 million and would also limit 1031 Like-Kind Exchanges by deferring gains over $500,000.

It is important to stay up to date on these matters and plan accordingly. In some cases it is wise to finalize sale of an asset with significant capital gains if looking to avoid an increase in the tax bill that could come as a result of the proposal above.