There are a lots of ways on how to your capital gains tax problem. But today we will talk about couple of these ways because if we would talk about every single one we would be here for hours. And you probably want to get into investing as fast as possible.
1) Exclude home sales
To be qualified in this first one you must have own your home (house / apartment) and use it as your main residence for at least 2 years in the 5-year length period before you can sell it.
You also must not have to excluded another home from capital gains in the two-year period before the home sale.
And if you meet these rules you can fully exclude up to $250,000 in gains from a home sale. And if you are single you can exclude up to $500,000.
2) Rebalance with dividends
In this one the talk is about rather than reinvest dividends in the investment that paid them, consider putting that money into your underperforming investments.
Normally you rebalance by selling securities that are doing well and put that money into some underperforming stocks, bonds or other securities. However by using dividends to invest in underperforming assets will allow you avoid selling strong performers. And this will lead to you avoiding capital gains that would come from that sale.
3) Hold on
Here whenever possible hold onto assets for longer periods (over a year) so you can qualify for the long-term capital gains tax rate.
And this is because long.term capital gains tax has a lower rate than short-term capital gains rate.
4) Carry losses over
Here if your net capital loss are exceeds the limit you can deduct for the year.
The IRS will allow you to carry the excess into the next year and it will allow you to deducting it on that year’s return.
5) Consider a robo-advisor
In this one considering a robo-advisor which will manage your investments for you automatically might be a good idea for some of you. I personally im not a fan of robo-advisor and its because I prefer to manage my investments myself. But this is up to you, because what works for some may not work for you.
The Robo-advisors will often employ smart tax strategies. And this includes the tax-loss harvesting in which involves selling losing investments to offset the gains from winners.
6) Use tax-advantaged accounts
And finally plans like 401(k), retirement accounts, 529 college savings accounts and others may help you to grow your investments tax-free or tax-deferred.
This means that you will not need to pay capital gains tax if you sell investments within these accounts.
Both the roth IRAs and 529s have big tax advantages when it comes to tax-free or tax-deferred. And qualified distributions from those are tax-free. Or to make it very simple you don’t pay any taxes on investment earnings.
With traditional IRAs and 401(k)s you will pay taxes whenever you take distributions from the accounts in retirement.