Capital gains taxes are set to spike. How can you legally avoid them?
Among the spree of new taxes and tax hikes beginning in 2021 is a proposal that could potentially double capital gain taxes. How do you avoid that massive financial hit?
The Tax Tsunami
The newly proposed change to the federal capital gains tax is set to propel this tax to this highest rate since the 1920s.
This new rate of almost 44%, could effectively be close to 60% for those in states with their own capital gains taxes, and which are adding them.
This puts America at the top of the list globally for high investment taxes according to Reuters.
This is sandwiched between all types of other new taxes and tax hikes. You get taxed when you earn your money, when you make money on investing that money, and with sales taxes when you spend any leftover gains.
So, how can you legally avoid this big new tax hit that is trying to take a bite out of your money and plans?
Ways To Avoid Capital Gains
1031 exchanges are a powerful legal tool for avoiding capital gains taxes. They are used to roll over some or all of your gains on the sale of an asset into new investments, all while deferring taxes. These taxes can continually be deferred until you are in a lower tax bracket, have losses to offset gains, or infinitely into the future.
Self-Directed IRAs & 401ks
Investing through self-directed 401ks and IRAs opens up the playing field to invest in a broader menu of investments. It also offers the ability to gain tax deductions on earned income, and to defer taxes on gains until you are in a lower tax bracket in retirement.
Roth IRAs are a little different. Instead of a tax deduction in the year of contribution, you get to enjoy not just tax deferred returns, but tax free returns. That’s a whole lot better if you are thinking long term.
Gifts & Donations
Chances are that you will be doing some giving and donating anyway. Why not get some tax benefits from it? Especially when it means you can give more instead of taking a big tax hit.
This may include gifting assets and investment funds to family members. This can help minimize the overall tax hit for your family, and can reduce how much they’ll pay in taxes.
It can also include donating assets themselves to nonprofits in exchange for tax breaks.
Tax Loss Harvesting
Instead of holding losing investments it is sometimes better to exit them and use the losses to offset gains elsewhere.
If assets aren’t burning a hole in your finances, and you can afford to hold a little longer, you can typically enjoy paying less on long terms capital gains, than short term capital gains on assets that you’ve held for one year or less.