Darrell Bryant Retirement Blog

Tuesday, March 9, 2021

Ways to Reduce or Avoid Capital Gains Tax

By Darrell Bryant

It was Benjamin Franklin who said that nothing is certain except death and taxes. Although generally we can’t avoid being taxed, there are some strategies to help us mitigate and manage our tax obligations. As we watch the market go up and down (and then up again), we rarely think about the taxes we might pay with the rise of our portfolio or home value—but we should.

The amount of taxes you pay is dependent on the amount of time you hold your asset. Having an investment for a year or less will trigger short-term capital gains taxes, which are taxed as ordinary income, which can be as high as 37%. Long-term capital gains taxes are based on your income and are taxed at 0%, 15%, and 20%. (1) The best way to pay lower capital gains taxes is to hold your asset for more than a year, but there are other ways to avoid paying taxes altogether. Let’s dive in.

Tax-Deferred Accounts

Saving for retirement is one way to avoid taxes on capital gains. Sale of investment gains within a Traditional 401(k)/IRA do not trigger capital gains. You only pay taxes when you withdraw money from your traditional retirement accounts. In this case it’s taxed as ordinary income. A Roth 401(k)/IRA, on the other hand, allows you to withdraw your money tax-free, as long as you are 59½ and have held the Roth for more than five years. 

Gains & Losses

Some of your investments may lose value, which provides an opportunity for tax loss harvesting. For capital gains purposes, losses can be a great tool to offset gains. The gain and loss would cancel each other out if the loss were equal to the gain. If your losses are greater than your gains, then you can use up to $3,000 of loss carry forwards in future years. (2) And of course, there are state taxes as well. Not every state has a state income or capital gains tax. 

Cost basis is another piece of the capital gains tax puzzle you need to keep in mind. Cost basis is the amount you paid for your asset. There are many ways to decide what cost basis to use if you have multiple asset purchases in different periods. Most investors use the first in, first out method (FIFO), but there are methods such as last in, first out (LIFO) and average cost. If these accounting terms seem like a foreign language, then it’s best to consult your financial advisor and CPA before selling. 

Other Assets

Another asset that incurs capital gains tax when sold is your house. The IRS allows you to exclude $250,000 of capital gains, or $500,000 if filing jointly, but you have to own your property for more than two years and it must be the primary residence. (3) Those rules apply to federal as well as state taxes on the property. Anything over the exclusion amounts will incur federal and state taxes.

We Are Here to Help

In addition to death and taxes, you can also be certain of having a partner by your side on your financial journey. We at D. Bryant Retirement Strategies are here to help you navigate all your options when it comes to mitigating capital gains taxes—taking into consideration your unique circumstances regarding your sales, cost basis, and length of time of ownership.

To see if we’d make a good partner for you, let’s meet to discuss your questions, concerns, and goals. To schedule a complimentary, no-obligation meeting, call (402) 932-2141 or email contact@dbretirement.com. I look forward to hearing from you soon!

About Darrell

Darrell Bryant, CFS®, CAS® is Omaha’s Retirement Strategist. As the founder of D. Bryant Retirement Strategies, he focuses on helping individuals and couples nearing retirement do so successfully. Along with more than 30 years of experience, he received the Certified Fund Specialist (CFS®) designation and a Certified Annuity Specialist (CAS®) designation from the Institute of Business & Finance. Passionate about helping as many people as possible in his community, he hosts Retirement Strategies Radio, heard Saturday mornings at 7:00 a.m. on 1110 KFAB. He has also written articles on financial planning that have been featured on Fortune.com, FoxBusiness.com, Money.com, and in the Midland Business Journal. To learn more, visit his blog, his website, or connect with him on LinkedIn.

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(1) https://www.investopedia.com/taxes/capital-gains-tax-101/#citation-10

(2) https://www.investopedia.com/taxes/capital-gains-tax-101/#citation-10

(3) https://www.nerdwallet.com/article/taxes/selling-home-capital-gains-tax