Optimizing Your Finances: 6 Proven Ways to Reduce Your Capital Gains Taxes

Generating capital gains is rarely easy, and those who succeed often confront large tax bills. Careful planning and judicious investment can cut just about any capital gains tax bill significantly. Become familiar with the following six strategies, and you should always be able to reduce your capital gains taxes in almost any situation.

1. Make Use of Economic Opportunity Zones

The most recent revision of the federal tax code included a new option for many investors. So-called “opportunity zones” are designed to attract capital by allowing investors to defer paying taxes on their gains for up to a decade.

Most investors will not be well-positioned to become actively involved with such projects. Funds that simply collect money and direct it appropriately, however, have become widely regarded as Stable Investments that also afford favorable capital gains tax treatment.

Investing in an opportunity zone in this fashion will allow just about anyone to offset other capital gains. While a tax bill will eventually come due, it will normally be quite a bit lower than if more conventional investment strategies had been used. In the meantime, investors who allocate capital to opportunity zones can feel good about helping “economically distressed” communities get back on track.

2.  Book Some Losses

Many investors end up holding on to losing positions for too long even in the best of times. When other components of a portfolio have been sold off to produce returns, that will become especially costly.

Recording some impressive capital gains generally serves as a great time to rid a portfolio of under-performing positions. The losses that result can be used to offset capital gains and even modest amounts of ordinary income. Tax-loss harvesting is a powerful tool that can be used in many common situations.

3.  Stick to Long-Term Trades

Turning over stock positions too frequently will subject you to the tax rates levied on regular income. Active investors like day traders might not always be able to avoid that trap, but most should be able to sidestep it neatly, in general.

One easy way to make the need for short-term trades less likely is to stick to exchange-traded funds and the like. By being less volatile than individual stocks, broad-based funds lessen the need to take frequent defensive action.

4.  Give to Charities or Family Members

Instead of selling a stock that has performed well, consider making a gift of it. While that will leave you with less money than you would otherwise have, the act of giving can be its own reward.

Worthy nonprofits are always happy to accept gifts of stock that impose no tax obligations on donors. Most people will also be eligible to give annual gifts to children that can be carried out without adding to a tax tab.

5.  Invest in Your House

Although there are some limits, capital improvements made to primary residences can mostly be enjoyed free of taxes. It can make sense to convert recent capital gains into residential amenities and additions that help keep your tax bill lower.

6.  Fund a Health Savings Account

Qualified taxpayers can dump pre-tax money into health savings accounts whose balances grow free of taxes. Especially for those who have not yet built up such nest eggs, this can be an especially valuable move.

The six accessible strategies above can all be used by the average person to keep capital gains taxes down. Some combination of these should almost always be employed whenever recent returns have made a large tax bill more likely.

Jesse Fin

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