No one likes to pay taxes, especially on an appreciated investment, but you can minimize capital gains taxes with careful planning. Here are three ideas.
First, hold investments for the long term, which means at least a year. Short-term capital gains (on assets that you have held for less than one year) are taxed as ordinary income; long-term capital gains (on assets that you have held for one year or more) are taxed at rates of 0%, 15%, or 20% in 2021, depending on your tax bracket.
Second, use capital losses to offset capital gains. If you have a losing investment in your portfolio, you might want to sell it and use the loss to offset gains. If you have $4,000 in capital gains, for example, and you take a $4,000 capital loss, the two will cancel each other out, and your tax liability on the gains will be eliminated.
Third, consider low-turnover mutual funds. Any time your mutual fund sells a security at a gain, that gain is taxable, and the law requires mutual funds to pass most of their net gains on to investors. So, when you own shares of a fund, you realize a capital gain when the fund sells a security at a gain (either long-term or short-term, depending on how long the mutual fund held the securities). You can help avoid these types of gains by investing in a low-turnover mutual fund.
Do you need help minimizing capital gains taxes? We can review your portfolio and make suggestions. Call or email us. We’re always here to help.