For everyone with a monthly income, it is recommended to invest their money somewhere to yield returns. However, no investment ever happens without the possibility of some risk. When you profit from your investments, you are expected to pay taxes on your income. The more profit you yield, the bigger the tax implications will be.
It is understandable that you would not want a chunk of your income to go into tax payments. Fortunately, there are a few ways to minimize your capital gains taxes legally. If you work with an expert in capital gains solutions in Simi Valley, CA, you might even be able to avoid taxes completely. Hire a financial advisor today if you feel confused.
Tips for minimizing capital gains tax
- Follow the one-year rule.
Depending on the period of time you have owned an investment before you decide to sell it, you can either have long-term or short-term capital gains. If you have short-term capital gains, the tax amount would be the same as your regular income tax amount. However, if you are in the top bracket, you would have to carry the burden of heavy taxes.
If you sell your investments after one year, you can take the long-term capital gains rate, which maxes out at 20%. This is significantly less than the top rate for short-term capital gains, which stands at 39.6%. Therefore, you can reduce your taxes if you wait a bit.
- Take advantage of retirement plans that do not require you to pay taxes.
Certain retirement plans, such as the 401(k), 403(b), and IRA, are not subject to taxes. Thus, if you decide to put your money into these accounts, you could grow the amount without worrying about immediate taxes. If you have assets in your retirement plan, you could sell them without having to pay capital gains tax.
- Look for ways to trim your taxable income.
As you would already know, your capital gains tax depends on your taxable income. The lower the number is, the lesser tax you would need to pay. It is not practical to get rid of income sources just to reduce taxes, but you can still take advantage of every deduction you are eligible for. You can score deductions from IRA and charitable contributions, mortgage expenses, business expenses, and medical expenses.
If you are doing your taxes for the first time this year, or you do not have enough knowledge to get the job done right, work with a capital gains solutions expert in Simi Valley, CA.