Kevin Roberts, CPA | Roberts CPA Group | Tax - Wealth Management - Virtual CFO - Accounting - Payroll | 502-426-0000

       

 

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Kevin Roberts, CPA

Roberts CPA Group

 

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13 Ways to Avoid the Dreaded Capital Gains Tax


 

Because most savvy people (or at least those who have a smart tax pro in their corner) can decide the timing and amount of capital gains they choose to realize each year, the capital gains tax is considered by many economists to be very "elastic".

And as such, the amount of capital gains we choose to realize on your behalf depends heavily on the favorability of the capital gains tax rate.

As a result, over half of capital gains in this country are never taxed. They are avoided completely. But that means the effort of avoiding the tax causes capital to be allocated inefficiently in the meantime.

In my opinion, this particular tax can sometimes punish growth and entrepreneurship. Were the capital gains tax to be abolished entirely, some of the "lost" tax would be regained through economic expansion and more efficient and liquid capital markets.

On the other hand, since capital gains taxes have been raised, the slowing of economic growth *could* be reducing tax revenue by more than the additional tax collected.

But all of this is a question for economists, and smarter ones than myself. For you and me, it is neither here nor there: OUR business is in helping you structure and position your assets so you can AVOID this tax — and, hopefully, income taxes as well.

So you agree — we might as well hold on to as much as possible for you, yes?
There are multiple ways that investors and those with capital gains can avoid being taxed on them. Here are 13 of the loopholes the government’s gain tax unintentionally incentivizes. All of these are things we can help you with …

1. Match losses. Investors can realize losses to offset and cancel their gains for a particular year. Savvy investors harvest capital losses as they occur and then use them on current and future taxes. Up to $3,000 of excess losses not used to cancel gains can offset ordinary income. The remainder of the loss can be stored and carried forward indefinitely.

The amount of capital gains realized depends heavily on the favorability of the capital gains tax rate. This encourages investors to sell great investment vehicles during a temporary dip, only to buy them back again 30 days later for a new cost basis.

2. Primary residence exclusion. Individuals can exclude up to $250,000 of capital gains from the sale of their primary residence (or $500,000 for a married couple). As a result, families who stay in the same home for decades suffer a tax that more mobile families avoid. Smart homeowners who might move (or need the capital) will move more frequently to avoid the tax. Needlessly selling and buying a home is an arduous cost to the economy.

3. Home renovation. Sharp real estate agents and home renovators make their under-market investment purchases their primary residence while they are fixing them up. They then flip the houses, selling for a better sales price but avoiding any tax on their gains via the primary residence exclusion.
 

  Last May I hosted a live webinar on Social Security Strategies and Secrets you should understand and use as you contribute and eventually take distributions from this program.  If you are interested in watching the VIDEO REPLAY you can click here.  Kevin
 

 

4. 1031 exchange. If you sell rental or investment property, you can avoid capital gains and depreciation recapture taxes by rolling the proceeds of your sale into a similar type of investment within 180 days. This like-kind exchange is called a 1031 exchange in the relevant section of the tax code. Although the rules are so complex that people have jobs that consist of nothing but 1031 exchanges, no one trying to avoid paying this capital gains tax fails. This piece of valueless paperwork does the trick.

5. Stock exchange. Stock investors with highly appreciated securities can also do a like-kind exchange. Certain services offer investors with one highly appreciated security a way to trade it for an equivalently valued but more diversified portfolio. This expensive service can help investors avoid paying even larger capital gains taxes. But it is an entire field invented by government taxation. If the capital gains tax didn’t exist, all of those valuable workers and capital could be allocated to more economically beneficial means.

6. Exchange-traded funds. ETFs use stock exchanges to avoid triggering capital gains when stocks move in or out of the index on which the ETF is based. Stocks moving out of the index are exchanged for stocks moving into the index. Investor cost basis transfers to the new owners of the securities.

7. Traditional IRA and 401k. If you are in the higher tax brackets during your working career, you can benefit from contributing to a traditional IRA or 401k.

 

This both reduces your income while you are in the higher brackets, and eliminates any capital gains as a result of trading in the account. Selling appreciated asset classes in a tax-deferred account avoids the capital gains tax normally associated with such trading.

 

During gap years, between retirement and age 70, withdrawals from these accounts could be made in the lower tax brackets.

8. Roth IRA and 401k. These accounts can postpone taxes to a more favorable year, but Roth accounts can avoid them altogether. Having paid tax on deposits, a Roth account allows tax-free growth for the remainder of not only your life, but also the lifetime of your heirs. Unless you are in the higher tax brackets and approaching the gap years, Roth accounts are usually an excellent tax strategy.

However, all of the tax-advantaged accounts described are further paperwork at the end of the day. No real economic value is gained from this complicated shuffle of assets, even though you clearly benefit by retaining more of your assets.

9. Give stocks to family members. If you are facing a high capital gains rate, you can give your highly appreciated securities to family members who are in lower brackets. Those receiving the gift do assume your cost basis for computing the gain, but use their own tax rate.

10. Move to a lower tax bracket state. State taxes are added on to federal gains tax rates and vary depending on your location. California has the highest U.S. capital gains rate and the second highest internationally, with a top rate of 37.1%. In the United States, nine states add nothing to the federal top rate of 23.8%: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. No national value is added by moving, although individuals can certainly gain from living in a state that taxes their particular assets favorably.



11. Gift to charity. Instead of giving cash to charities you support, you can give appreciated stock. You receive the same tax deduction. When the charity sells the stock, it is not subject to any capital gains tax. The cash you would have given is the same amount you would have had for selling the stock and paying no capital gains yourself.

12. Buy and hold. Many investors buy good index funds that never need to be sold. Even if you re-balance regularly, rebalancing can often be accomplished by using the interest and dividends paid to purchase whichever investments need to be bolstered. The downside is that your capital is locked inside the investment vehicles and not free to be used for greater economic gain.

13. Wait until you die. Most people die holding highly appreciated investments. When you die, your heirs get a step up in cost basis and therefore pay no capital gains tax on a lifetime of growth.

All of the above (and more) are strategies we can look at as we examine your future tax burdens. The last one, however … well, let’s not settle for that one, shall we?

As usual if you have any questions or comments or want to do some tax/financial planning yourself, feel free to call me here at the office at 502-426-0000

 


 

 

Please Would You Give Us Your Feedback & a Testimonial on Our Hotline at 800-609-9006 ext. 9078

 

Hey it’s Kevin Roberts and I wanted to ask you a favor.  We’ve just installed a toll-free number that I would like for you to call and tell me how you think we are doing as your CPA firm.

 

Just dial 800-609-9006 ext. 9078 and follow the instructions, it only takes 1 minute.  If we’ve done a good job please let me know.

 

And if we can improve on anything, please mention that too. Thanks!  Kevin

 


 

Remember you can call our offices if you have any questions about these or any other bookkeeping, accounting, tax, financial planning or insurance related issues, at 502-426-0000. 

 

Regards, Kevin Roberts, CPA

President, Roberts CPA Group

 

 

 

 

Kevin Roberts, CPA | Roberts CPA Group | 12906 Shelbyville Rd #220
Louisville, KY 40243 | 502-426-0000 | Fax: -502805-0408
La Grange office: 209 S 1st Street | La Grange, KY 40031
502-222-7260 | www.louisville-tax.com