Laurence Hale, AAMS®, CRPS®
Principal/Managing Partner, Investment Advisor & Chief Investment Officer
Capital gains tax is a tax on the profits you make when you sell an asset that has increased in value – anything from stocks and bonds to real estate, and other such appreciating assets. While you can't completely avoid paying capital gains tax, there are ways to reduce the amount you owe.
1. Use Tax-Advantaged Retirement Accounts
One of the best ways to avoid capital gains tax is to hold your investments in tax-advantaged retirement accounts like 401ks and IRAs. You don't pay any capital gains tax on growth within these accounts until you withdraw the money in retirement. And at that point, most people are in a lower tax bracket so they pay less tax. Max out contributions to these accounts each year to shield more of your investments.
2. Invest Well for the Long-Term
Capital gains tax only applies when you sell an asset. So if you hold investments long-term, you can defer paying tax and take advantage of compound growth. For 2024, the long-term capital gains tax rate doesn't kick in until you've held an asset for over a year. The longer you hold, the more you can lower your tax bill.
3. Use Tax-Loss Harvesting
This strategy involves selling investments at a loss to offset capital gains. For example, if you realized a $10,000 capital gain on one investment but have a $5,000 loss on another, you can deduct the $5,000 loss to lower your net capital gain to $5,000. This results in less tax owed. Work with a tax advisor to efficiently harvest losses.
4. Donate Appreciated Assets
If you donate appreciated assets like stock or real estate to a qualified charitable organization, you can deduct the assets' full fair market value without paying capital gains tax. This generates a larger deduction than donating cash. It also avoids tax you'd owe if selling the assets.
5. Use Exclusion Rules
There are capital gains tax exclusion rules that allow you to avoid tax on a portion of your gains. For 2024, the primary residence exclusion allows married couples to exclude up to $500,000 of capital gains from the sale of their home if they lived in it 2 out of the past 5 years.
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6. Leave Assets to Heirs
When you leave appreciated assets to heirs, they inherit the assets at their current value. This lets them avoid any built-in capital gains tax and can be combined with the step-up in basis at death. Heirs only owe tax on gains after they receive the assets.
7. Move to a Lower Tax State
Some U.S. states like Florida, Texas, and others have no state income tax. Moving to one of these states can help you avoid state capital gains taxes. You may also establish legal residency in states like Washington or Nevada which have no capital gains tax.
8. Offset Gains with Losses
As mentioned earlier, realizing capital losses can offset capital gains to lower your tax liability. You can also use a capital loss carryover to offset gains in future years. Capital losses can be carried forward indefinitely.
9. Use All Available Tax Credits
Tax credits like the foreign tax credit and child tax credit directly reduce your tax bill, including capital gains tax owed. Make sure to claim all tax credits you're eligible for.
10. Plan Strategically
The key is proper planning and working with knowledgeable tax and financial planning professionals. With the right moves, you can minimize how much capital gains tax you pay and keep more profits.
To see how our team at Weiss, Hale & Zahansky Strategic Wealth Advisors could help you to do this through our personalized Plan Well, Invest Well, Live Well.™strategic process, schedule a complimentary consultation on our website or by calling (860) 928-2341.
Authored by Principal/Managing Partner Laurence Hale AAMS, CRPS®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084. 860-928-2341. www.whzwealth.com.