It’s a common error to forget about taxes when planning investments. Obviously, taxation influences rentability directly and it can be the difference between a good and a bad investment. There is a reason why It’s said that when it comes to taxes – the later you pay the better.
Deferring Capital gains taxes consists in delaying the payment of the taxes for your investments. This is important simply because it will help your investments grow more rapidly because instead of using the money to pay taxes you can reinvest it, and possibly generate more profit.
As the name suggests, capital gains tax is the tax you pay for the surplus on the sale. When you are selling stocks your capital gains can have a significant influence on your final profit.
However, the good news is that you can learn how to defer capital gains tax or even reduce it or avoid it completely. There are several tools that you can use to legally influence when and how much you will be taxed.
1. Invest In Low Income Communities
An economic development program, the so-called opportunity zones are meant to bring funds, create jobs and boost economic growth in low-income, underfunded communities, by attracting individuals and companies with capital gains to invest unrealized capital gains.
So if you are wondering how to defer capital gains tax and at the same time help communities develop and people live better, this is a great opportunity for you. This federal incentive can provide you with a way to postpone, reduce or even completely avoid taxes on your capital gains on appreciated stock sales while helping people live better. There are three options you can choose from, depending on what your goals and needs are.
2. Donate To Charitable Causes
If you are planning to make a charitable donation to a cause you believe in, donating stock instead of writing a check, can save you the taxes you would have to pay for it, as well as “lower” your unrealized gains, by getting a charitable tax deduction in the amount of the fair market value for the stock you’ve donated.
In other words, donating is one more strategy beneficial both for you and for others, and it was used for much longer than investing in qualified opportunity zones. However, this strategy may not be beneficial for individuals or companies that weren’t planning to donate.
3. Avoid Moving To Higher Tax Bracket
The long-term rate for 10% and 12% income tax brackets have a long-term capital gains rate of 0%. In 2022, this means if your taxable income isn’t above $41,675, you will avoid paying capital gains tax completely. If it’s over the threshold, you will pay 15% or more, depending on the amount. Naturally, whenever possible and legal, you should find a way to avoid going over the established income level.
4. Gift Your Stock To Someone In A Lower Tax Bracket
As we said, people in a lower tax bracket won’t pay any capital gains tax, or at least they will pay less. This is why gifting stock to a family member is a good idea. They can sell the stock without being taxed. However, the laws on the limit of gifting are changing, so you should be careful, especially regarding the kiddie tax.
5. Hold Your Stocks For At Least One Year
One of the things that influence how much you will be taxed on the capital gains on stocks is how long you’ve held them. If you sell your stocks after you’ve had them for over one year, you will be taxed with a long-term capital gains tax rate. This is much preferable to selling them before that since short-term capital gains rates are as high as income tax.
While always recommendable, longer hold periods, aren’t the best way to support your stock’s profit. Instead, you should combine this with another strategy for delaying, reducing, or avoiding capital gains tax.
Capital gains taxes can impact the profits of your appreciated stocks. There are many different strategies available to you legally that can help you defer capital gains taxes, and there are some that can even help you reduce or completely avoid them.
So when you have capital gains taxes, you should look at all of your options – from the most basic strategies to lower your capital gains tax (like always avoiding to sell with short-term tax rates, which are higher) to the most complicated but more favorable ones (like investing in opportunity zone funds).
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