3 Ways To Combat Capital Gain Taxes

Investing in real estate or the stock market may be an exciting way to increase your income. The gains from such investments can support future investments, save for a project, or even contribute to your retirement. Many people are hesitant to invest because of the potential capital gains taxes they will have to pay or the taxes owing on any profit gained from the sale of a specific investment.

Consider how the investment will help you achieve your goals

When considering investments, consider the following questions: How would this help me get where I want to go? It can be challenging to sell valued stocks, but it is far more vital to own a good investment, even if it incurs a tax penalty, than a bad investment solely to avoid taxes. After all, the only way to avoid paying capital gains is to die, which is not really a strategy.

Clever strategies

To maximize your profits, maintain your assets for a year or more. Capital gains tax is calculated using two factors: how long you keep the investment and your personal income tax band. If you sell the investment within a year, the net profit is taxed at your regular income tax rate, which is typically greater than long-term capital gains tax. If you keep it for more than a year, the profit is taxed at 0% to 20%, depending on your tax status that year. 

Pro tip: Sell lucrative equities when you're in a lower tax band, or use tax-advantaged accounts like a 401(k) to reduce your total taxable income.

Prepare for taxes ahead of time

Create a savings account just for tax season. In this manner, money is already accessible to pay taxes immediately. Savings are calculated depending on how much they expect to pay in taxes for the asset sold, which is determined by the sale price, length of ownership, and tax bracket. To prevent falling short, you should save more than you anticipate spending.