how to avoid capital gains taxes
if you want to invest money and make a profit you will owe capital gains taxes on that profit there are however a number of perfectly legal ways to minimize your capital gains taxes investopedia s tax savings guide can help you maximize your tax credits deductions and savings order yours today capital gains tax strategiesthe capital gains tax effectively reduces the overall return generated by the investment but there is a legitimate way for some investors to reduce or even eliminate their net capital gains taxes for the year the simplest of strategies is to simply hold assets for more than a year before selling them that s wise because the tax you will pay on long term capital gains is generally lower than it would be for short term gains 1capital losses will offset capital gains and effectively lower capital gains tax for the year but what if the losses are greater than the gains two options are open if losses exceed gains by up to 3 000 you may claim that amount against your income the loss rolls over so any excess loss not used in the current year can be deducted from income to reduce your tax liability in future years 12for example say an investor realizes a profit of 5 000 from the sale of some stocks but incurs a loss of 20 000 from selling others the capital loss can be used to cancel out tax liability for the 5 000 gain the remaining capital loss of 15 000 can then be used to offset income and thus the tax on those earnings so if an investor whose annual income is 50 000 can in the first year report 50 000 minus a maximum annual claim of 3 000 that makes a total of 47 000 in taxable income the investor still has 12 000 of capital losses and can deduct the 3 000 maximum every year for the next four years be mindful of selling stock shares at a loss to get a tax advantage and then turning around and buying the same investment again if you do that in 30 days or less you will run afoul of the irs wash sale rule against this sequence of transactions 13 material capital gains of any kind are reported on a schedule d form 14capital losses can be rolled forward to subsequent years to reduce any income in the future and lower the taxpayer s tax burden 1among the many reasons to participate in a retirement plan like a 401 k s or ira is that your investments grow from year to year without being subject to capital gains tax 1 in other words within a retirement plan you can buy and sell without paying taxes every year most traditional tax advantaged retirement plans do not require participants to pay tax on the funds until they are withdrawn from the plan that said withdrawals are taxed as ordinary income regardless of the underlying investment 15with a roth ira or roth 401 k for which income taxes are collected as the money is paid into the account qualified withdrawals in retirement are tax free 16as you approach retirement consider waiting until you actually stop working to sell profitable assets the capital gains tax bill might be reduced if your retirement income is lower you may even be able to avoid having to pay capital gains tax at all 1in short be mindful of the impact of taking the tax hit when working rather than after you re retired realizing the gain earlier might serve to bump you out of a low or no pay bracket and cause you to incur a tax bill on the gains remember that an asset must be sold more than a year to the day after it was purchased in order for the sale to qualify for treatment as a long term capital gain if you are selling a security that was bought about a year ago be sure to check the actual trade date of the purchase before you sell you might be able to avoid its treatment as a short term capital gain by waiting for only a few days 17these timing maneuvers matter more with large trades than small ones of course the same applies if you are in a higher tax bracket rather than a lower one most investors use the first in first out fifo method to calculate the cost basis when acquiring and selling shares in the same company or mutual fund at different times however there are four other methods to choose from last in first out lifo dollar value lifo average cost only for mutual fund shares and specific share identification 18the best choice will depend on several factors such as the basis price of shares or units that were purchased and the amount of gain that will be declared you may need to consult a tax advisor for complex cases computing your cost basis can be a tricky proposition if you use an online broker your statements will be on its website in any case be sure you have accurate records in some form finding out when a security was purchased and at what price can be a nightmare if you have lost the original confirmation statement or other records from that time this is especially troublesome if you need to determine exactly how much was gained or lost when selling a stock so be sure to keep track of your statements you ll need those dates for the schedule d form 