How To Avoid Capital Gains Tax

By Preston Rosamond

As we watch the market go up and down and then up again, we rarely think about the taxes we might pay with the rise of our portfolio or home value. But we should because the tax man always cometh—however, you can control how much you owe. 

The amount of taxes you pay is dependent on the amount of time you hold your asset. Having an investment for a year or less will trigger short-term capital gains taxes, which are taxed as ordinary income, which can be as high as 37%. Long-term capital gains taxes are based on your income and are taxed at 0%, 15%, and 20%. (1) The best way to pay lower capital gains taxes is to hold your asset for more than a year, but there are other ways to avoid paying taxes altogether. 

Tax-Deferred Accounts

Saving for retirement is one way to avoid taxes on capital gains. Trading in a 401(k) or Traditional IRA does not trigger capital gains. It does so only when you withdraw the money when it’s taxed as ordinary income. But if you are at retirement age, odds are you will be in a lower tax bracket. A Roth IRA, on the other hand, is tax-free, as long as you are 59½ and have held the Roth for more than five years. 

Gains & Losses

Not all your stock picks are going to be winners. There are times when you have to bail out of a sinking ship. For capital gains purposes, losses can be a great tool to offset gains. The gain and loss would cancel each other out if the loss were equal to the gain. If the loss is greater than the gain, you can use up to $3,000 of the loss toward your ordinary income. (2) You can also carry the loss to the next year until you run out of losses to offset gains. And of course, there are state taxes as well. Luckily, Texas does not have a state income tax or capital gains tax. 

Cost basis is another piece of the capital gains tax puzzle you need to keep in mind. Cost basis is the amount you paid for your asset. There are many ways to decide what cost basis to use if you have multiple asset purchases in different periods. Most investors use the first in, first out method (FIFO), but there are methods such as LIFO and average cost. If these accounting terms seem like a foreign language, then it’s best to consult your financial advisor and CPA before selling. 

Other Assets

Another asset that incurs capital gains tax when sold is your house. The IRS allows you to exclude $250,000 of capital gains, or $500,000 if filing jointly, but you have to own your property for more than two years and it must be the primary residence. (3) Those rules apply to federal as well as Texas taxes on the property. Anything over the exclusion amounts will incur federal and state taxes.

As you can see, capital gains tax is a very complicated topic. It isn’t easy, especially if you keep track of your sales, cost basis, and length of time of ownership. Reach out to us. We can help you make sense of all your options when it comes to avoiding capital gains taxes. Call my office at 830-798-9400 or email smrosamond@rosamondfinancialgroup.com to discuss your options.

About Preston

Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with nearly two decades of industry experience. He provides comprehensive wealth management and financial services to individuals, professionals, and families who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch and a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing smrosamond@rosamondfinancialgroup.com or schedule a call with our online calendar.

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(1) https://www.investopedia.com/taxes/capital-gains-tax-101/#citation-10

(2) https://www.investopedia.com/taxes/capital-gains-tax-101/#citation-10

(3) https://www.nerdwallet.com/article/taxes/selling-home-capital-gains-tax