Chuck Norris once said, “Between income taxes and employment taxes, capital gains taxes, estate taxes, corporate taxes, property taxes, Social Security taxes, we’re being taxed to death.” He has a point!
The sad reality is that you owe taxes whenever you make money—or, in IRS terms, when you’ve realized gains. After selling an investment at a higher price than what you paid for it, capital gains tax is right there waiting for a slice of your profit. But there are ways to minimize what you owe in taxes so you can keep as much profit as possible.
1. Invest for the Long Term
It’s no surprise that long-term capital gains tax rates are more appealing than short-term rates. The longer you hold onto your investment, the better you can take advantage of long-term capital gains. Therefore, we recommend that you play the long game and wait at least a year to sell investments. If you decide to sell your investments in less than a year, then it could result in short-term capital gains tax. It’s all about timing.
2. Take Advantage of Tax-Deferred Retirement Plans
Investing your money in a retirement plan is possibly one of the smartest things you can do to minimize your tax burden. Whether it’s a 401(k), 403(b), or IRA, you can bypass immediate capital gains taxes while buying and selling investments within your retirement account.
Here are some other accounts that can potentially defer your capital gains just like the plans listed above:
- 529 college savings plans
- Health savings accounts (HSAs)
- Flexible spending accounts (FSAs)
3. Choose Your Stock Lots Wisely
What some investors may not know is that when they buy stock, it’s assigned a lot number. This number determines the cost basis for each of the shares you’ve bought. The cost basis is typically determined by the price of the share at the time of each purchase. For instance, what if you bought three shares of the same ETF but at different times? Maybe you paid $126 and $130 for the first two shares, and let’s say a couple of weeks later, you bought a third share at $89. If you wait a bit longer, and the cost basis of the third stock begins to rise, your first two stocks will show the most depreciation, while your third stock’s lot would’ve appreciated. Some brokerage accounts use the first in, first out (FIFO) rule. By using FIFO, your oldest lots will be sold first. It all depends on the stocks you decide to buy, their market fluctuation, and cost basis.
4. Pass Down Appreciated Assets by Inheritance
When planning to pass down assets to your children, the last thing we tend to think about is taxes. What many pre-retirees don’t know is that assets passed down at the time of death allow their children to pay tax only on the capital gains after they inherit your property. This is often referred to as a one-time “step-up in basis.” When assets are passed down to an heir, the capital gains from the deceased person’s assets are eliminated due to the step-up in basis, which alleviates the beneficiary’s tax burden.
We’re Here to Help
Your financial planning puzzle has many pieces, and navigating capital gains tax is just one part of the big picture. Although it can be a headache to figure out how much you owe, it’s important to remember that capital gains mean your investments are working in your favor. Whether you decide to reinvest your money in other ventures or defer capital gains, there are ways to incorporate them into your financial plan so you can reap the benefits.
Interested in learning more about tax planning before and after retirement? We at Shelton Financial Group are here to help make sure all the pieces of your financial puzzle fit together. Reach out to us at 260-436-7006 or schedule your free 30-minute Fit Call online.
About Shelton Financial Group
Shelton Financial Group is an independent, multi-generational firm in North East Indiana that takes a team approach to addressing their clients' most pressing financial concerns. SFG was founded in 1996 with the mission of helping people enjoy their wealth. Using their proprietary “One Life Formula,” the team at SFG focuses on what matters most to their clients and what they can control, integrating their wealth management needs with other aspects of their financial picture. To learn more about Shelton Financial Group and how they can help you achieve financial independence, visit them online.
The information expressed herein is obtained from sources that are believed to be credible, however, their accuracy cannot be guaranteed. All data is created from publicly available information and has not been independently verified by USA Financial.