Keep more of the gains.
Some gurus of positive portfolio thinking might suggest that paying capital gains tax is a good thing, because at least it means you have gains to tax in the first place. That’s easy to say until it comes time to actually sell an investment and fork over the dough — and positive thinking comes face to face with a financial negative. Besides, why pay taxes when there are smart, legal ways to keep your money? Enter seven experts ready to steer you toward strategies to cushion the blow of capital gains taxes even as you create more wealth.
Use the “year and a day” rule.
Capital gains taxes aren’t a blanket matter, as time horizons change their impact. Long-term capital gains apply to assets held more than one year. “These gains are taxed at a preferential top rate of 20 percent,” says Barbara Taibi, partner in the personal wealth advisors group of accounting firm EisnerAmper. “Short-term gains apply to assets held one year or less and are taxed at ordinary income rates. This means they can be taxed up to the taxpayer top rate of 37 percent. So if you have some flexibility on sale date, hold off for at least one year and one day.”
Buy into qualified opportunity funds.
This new wrinkle, introduced with 2017’s tax reform, can cut and potentially eliminate capital gains taxes, says Matt Peurach, partner at Morris, Manning & Martin in Atlanta. “People who invest in qualified opportunity funds with eligible capital gains, and hold that investment for five years, can reduce the reinvested gains subject to tax recognition by 10 percent.” After seven years, that climbs to 15 percent, and those “who sell their investment after 10 years pay no tax on the gain attributable to the appreciation of their investment. … It’s similar in concept to a like-kind exchange, except on steroids.”
Sell other assets for a loss.
If a stock has underperformed without much let up in sight, maybe now’s the best time to cut your losses — and hence, your gains tax. But be careful of the wash-sale rules, says Dustin Stamper, head of legislative affairs and managing director of Grant Thornton’s Washington National Tax Office. “If you buy the same stock you sold at a loss anytime within 30 days before or after the sale that created it, the loss can be disallowed.” There is a safe end-around, though: buying stock in a similar company or in the same industry. “This can put you in a similar investment position without running afoul of the wash-sale rules.”
Create a donor-advised fund.
Donor-advised funds are financial structures where you can make charitable contributions and recommend grants from the fund over time. And indeed, the tax advantages of a DAF are substantial — which largely explains why their popularity has exploded. “These are great vehicles to use to allow a taxpayer to contribute appreciated securities for more than one year’s worth of charitable gifts,” says Leann N. Sullivan, vice president and shareholder at TFC Financial Management in the Boston area. “By contributing say five years’ worth of charitable gifts into a DAF in one year, the taxpayer can often exceed the standard deduction and therefore reduce their overall taxes in a given year.”
Contribute to your retirement accounts.
Putting your money into a 401(k) or individual retirement account “is a win-win for investors,” says Adam Dechtman, a certified financial planner practitioner with Dechtman Wealth Management in Denver. “Not only are they investing for their future through compound returns, but they’re also lowering their taxable income in addition to not having to pay any capital gains tax if an investment was sold at a profit.” There is a caveat to remember though: “Investors cannot claim any capital losses if they sold an investment at a loss.” For the 2018 tax year, the IRA contribution limit is $5,500 per account, with an $18,500 threshold for 401(k)s.
Start a 529.
Here’s a great idea for parents who have large education expenses looming on the horizon. “The 529 is a college savings plan that allows for investment in mutual fund securities and will avoid any capital gain exposure,” says Andrew Ziskin, an AXA Advisor at AXA Equitable Life and based in Woodland Hills, California. “Assuming IRS rules are followed, all gains within a 529 plan can be distributed tax free as long as the funds are used to pay for qualified education expenses. Additionally, all contributions will also be tax free upon distribution.”
Leverage solar tax credits.
Let’s shed some light on how this works: If you invest in solar, the new tax laws allow you to mitigate capital gains and income taxes, says Anderson Lafontant, senior advisor advanced planning at Miracle Mile Advisors in Los Angeles. She cites the example of one client with a successful business exit last year “who we helped invest in several commercial and residential solar tax projects across the Los Angeles area. There are many tax benefits for solar investors, including the 30 percent solar tax credit and a 100 percent deduction of the value using the new bonus depreciation rules.”
7 tips to trim your capital gains taxes.
Don’t let capital gains taxes eat up your capital gains. Again, here are seven ways to avoid or alleviate the burden:
— Use the “year and a day” rule.
— Buy into qualified opportunity funds.
— Sell other assets for a loss.
— Create a donor-advised fund.
— Contribute to your retirement accounts.
— Start a 529 plan.
— Leverage solar tax credits.
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