13 Ways to
Dreaded Capital Gains Tax
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
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:
business is in helping you structure and position your assets
so you can AVOID this tax — and, hopefully, income taxes as
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 …
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
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.
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
click here. Kevin
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.
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.
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.
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
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.
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.
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.
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.
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
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.
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
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Regards, Kevin Roberts, CPA
President, Roberts CPA Group