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6 Ways to Reduce Capital Gains Tax

Reduce Capital Gains Tax

What is the Capital Gains Tax? The capital gains tax is a form of tax that is charged on an individual’s investment, specifically the profit realized on the sale of an asset that was purchased at a lower price. The capital gains tax is implemented on any capital asset that generates a real profit, either following the sale of the asset or through any means that generates increased value, such as in the way of interest. The amount of capital gains tax implemented is based on the increase in the net worth of the underlying asset. The most common capital gains taxes are placed on the sale of stocks, property, bonds, and property. Not all developed nations implement this form of taxation and the ones that do levy the capital gains tax will impose different rates of taxation for corporations and individuals. For the sale of equities that generate a profit, each national or state legislation will institute an array of fiscal obligations that must be adhered to regarding one’s capital gains. In the United States, all individual and corporate tax payers will pay income tax on the net total of all their capital gains just as they would on any sort of income earned. That being said, the tax percentage is lower on long-term capital gains, which are profits realized on the sale of assets that have been held for over one year following the sale. The tax rate on long-term capital gains was reduced in 2003 to 15% or 5% for individuals in the lowest two income tax brackets. In contrast, short-term capital gains possess higher tax rates; these forms of gains are typically taxed as ordinary income. The Internal Revenue Service allows individual to defer their capital gains taxes with tax planning strategies (primarily structured sales) such as charitable trusts, private annuity trusts, installment sales, and a 1031 exchange. The United States taxation model is unique in regards to capital gains tax because the country will levy a tax on worldwide income; the tax is placed on income no matter where in the world the individual resides. Methods to Reduce or Defer the Capital Gains Tax: Tax Loss Harvesting: Tax losses can carry forward may be applied to offset any capital gains realized over months or years into the future. Charitable Trusts: Capital gains are reduced and deferred by giving equity to various charities. Installment Sale: Capital gains are deferred by taking payments from a buyer over a period of years. Under this strategy there is no protection from buyer default. Deferred Sales Trust: Allows taxpayers to sell property to defer their capital gains due at the time of sale. 1031 Exchange:The capital gains tax is deferred by exchanging “like kind” property; generally this method is only available for real estate and tangible properties, both of which must be related to or tied into a business-related endeavor. Roth IRA: All transactions within the account do not incur a current tax liability. Structured Sale Annuity: Capital gains are reduced and deferred while gaining safety and a stream of fixed-income

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