3 Things to Do to Lower Your Capital Gains Taxes

Taxes are a part of life. And the IRS pretty much has the right to impose them on any income you earn with limited exceptions.

When you sell investments at a profit, the IRS can impose capital gains taxes. And those, frankly, aren’t so fun to deal with. But there’s good news: You can take steps to lower your capital gains taxes by doing these things.

1. Hold investments longer

The amount of capital gains tax you pay will hinge on how long you’ve held your investments before selling them. Investments held for a year or less are subject to short-term capital gains taxes, which are comparable to ordinary income taxes. In other words, for short-term gains, your tax rate depends on the tax bracket you fall into.

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But when you hold investments for at least a year and a day before selling them at a profit, you’re bumped into the long-term capital gains tax category. And that category means you’ll pay a lower rate of tax on your profit.

That rate will depend on your income bracket. But if you’re single with an income of $44,625 or less, your long-term capital gains tax rate is 0%. For an income of $44,626 to $492,300, you’re looking at a 15% long-term capital gains tax rate, while earnings above $492,300 are subject to a 20% rate. By contrast, if you’re single earning $492,301, your ordinary income/short-term capital gains tax rate is 35%.

2. Offset gains with losses

While your goal in investing is to make money, sometimes, a given investment may not work out. But if you sell an asset of yours at a loss, you can use that loss to offset capital gains (up to $3,000 per year).

So let’s say you’re looking at $2,000 in short-term capital gains, but you then sell a stock you own at a $2,000 loss. That loss will effectively cancel out your gain so you don’t owe the IRS money on it.

3. Use a Roth account

You’ll often hear that it’s important to invest in a retirement-specific account to ensure you have funds earmarked for your senior years. But using a tax-advantaged retirement plan like a Roth IRA or 401(k) can also benefit you financially.

When you invest in one of these accounts, your investment gains are never subject to taxes. So if you put $10,000 into a Roth IRA and it eventually grows to be worth $100,000, you’ll walk away with a $90,000 profit without having to pay the IRS an extra dime.

Capital gains taxes are, to a large extent, a part of life. But there are steps you can take to lower them or, in some cases, potentially get out of paying them entirely. If you’re worried about capital gains taxes, it’s a good idea to sit down with a tax professional and review your financial situation and portfolio when it comes time to file your taxes. They may be able to offer customized advice on ways to keep your IRS burden as low as possible.

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