You probably have never turned down an investment opportunity because of capital gains but you may have though about ways to help reduce the burden. There are lots of ways you can cut your tax bill with some creative options. Some of the taxes investors and higher-income taxpayers face include the 39.6% short-term capital gains taxes, 20% long-term capital gains taxes and finally the 3.8% net investment income tax or NIIT.
One of the easiest ways to reduce your tax burden is to keep an investment for more time. If you own an investment for more than one year you switch from the short-term capital gains taxes to the long-term capital gains taxes which slashes your rate drastically. This is just one of the many options out there. You may also be advised to realize a loss to help cut down your gains. If you have one bad investment you are holding on to you could cut down your gains by “realizing” the loss. You can also talk to a CPA or accountant about transferring your gains to a loved one that qualifies at a lower rate. There are a lot of logistics that go into a decision like this so it is advised that you talk to a professional. Finally avoiding wash sales is a good idea.
These strategies may not completely reduce your burden but they may help to lighten it. Some of these strategies are also designed to help defer your income taxes to help reduce how much you owe each year rather than reducing the amount entirely. Reducing your yearly amounts may also help you avoid NIIT liabilities because they are based off your modified adjusted gross income or MAGI. Also MAGI liability reductions can help completely reduce your NIIT liabilities by putting you in a lower tax bracket that does not qualify for NIIT.
These strategies can be a great way to help keep your taxes on investments lower at the end of the year. A CPA or accountant would be able to advise you on the best way to utilize these strategies as well as additional strategies you could use to cut your tax bill.
