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Understanding Capital Gains Taxes

Get the most from your investment portfolio by understanding capital gains taxes, the current tax rates, and how you can strategically (and legitimately) lower your capital gains tax bill. Our financial experts weigh in…

What are capital gains taxes?

When you sell a capital asset (i.e., stocks, bonds, precious metals, jewelry, and real estate) for more than what you paid for it, the result is a capital gain. A capital gains tax is what you pay on the capital gain, the amount based on how long you held the asset before selling it and your tax bracket.

There are two types of capital gains taxes:

Short-Term: Applies to gains from assets held for a year or less and are taxed as part of your ordinary income, wages, or salary.

Long-Term: Profits from the sale of assets held for more than a year with a taxation rate of 0%, 15%, or 20%, depending on your tax bracket. The tax rates for 2021 long-term capital gains is shown below:

Computing Capital Gains

Taxable capital gains for the year are reduced by the number of capital losses (when you sell an investment for less than you purchased it for) incurred in that year. To compute your net capital gain (the amount that is subject to taxation), subtract any capital losses from your total long-term capital gains.

Strategies to Offset Capital Gains Taxes

Fortunately, with the help of a knowledgeable and experienced financial and tax advisor, you can legally reduce your capital gains tax bill. Some of the most common strategies include:

  • Utilize losses incurred on previous investments to offset the tax bill in the current year.
  • Invest your capital gains in tax-advantaged retirement plans such as 401(k)s, Roth IRAs, and traditional IRAs, all of which allow your investments to grow without being subject to capital gains taxes.
  • Keep track of any qualifying expenses that were incurred when making or maintaining the asset which will increase the cost basis of the investment.
  • Wait to sell profitable assets until you have retired and are in a lower tax bracket.

Confused about capital gains taxes? Let us help.

The bottom line? Capital gains taxes are complex! That is where the help of a knowledgeable financial advisor such as Maggi Tax Advisory & Financial Group comes into play. To learn more about our financial services, please call our Hillsborough office at (813) 850-0131 and our Pinellas/Pasco office at (727) 351-6168.

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