How to Avoid Capital Gains Taxes
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- Michael MacKelvie
CERTIFIED FINANCIAL PLANNER
Vivid Wealth Creator, Fiduciary
CERTIFIED FINANCIAL PLANNER™
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Regis University, BA in Business, and Finance.
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Trusted by dozens of universities and schools, Michael regularly teaches financial courses to the public. He is the creator of Vivid Wealth Management, and runs his practice in the Pacific Northwest. As a trusted fiduciary and CERTIFIED FINANCIAL PLANNER™, Michael is legally required to act in the best interests of his clients. Being fully independent, he is not tethered to any specific company or product, and is able to meet the needs of his clients by providing true comprehensive planning, both with investments, and insurance. If you would like to meet with Michael, register to watch our solutions video, and you will have the chance to schedule a complimentary consultation.
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10 Ways to Decrease
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Notable side effects, but the step-up in basis rule does eliminate most capital gains liabilities.
2. Realizing Gains With Current Low Brackets
"Tax deferral" is often confused with "tax avoidance". The benefit of continually deferring taxes is often overvalued, thus, one should consider realizing some of their gains in this current low tax environment.
3. Utilizing a Capital Gains Budget
See the video for further details/examples, but this is helpful both behaviorally, and potentially financially. Realizing a specific amount of gains over several years can help combat a compounding tax liability, and fight the "timing game".
4. Moving to Another State
Be sure to talk with an advisor before considering this as residency, and domicile rules vary by state, but this can obviously be a great way to save on taxes (by moving to a state with a low capital gains tax).
5. Realize in a 0% Year
The current capital gains brackets are 0%, 15%, and 20%. By realizing your gains in a low income year, one could avoid paying any federal capital gains. Obviously, this requires not making a whole lot of money, so this may only be applicable to those in between jobs, on a sabbatical, or enjoying an early retirement.
6. Tax-Loss Harvesting
While this is a popular strategy, it does come with an opportunity cost (the lowering of your basis). Still, the ability to offset losses, and defer a gain while doing so (and giving one reason to diversify away from a large holding) is worth considering.
7. Invest in Qualified Opportunity Zones
Real estate has long enjoyed numerous tax breaks, and QOZ's are just another example. There is complexity here, but the benefits are huge (a chunk, or potentially all of your capital gain being forgiven). Definitely do your due diligence, and consult with an advisor on this if considering.
8. Consider a Collateral Loan
Debt has a lot of negative connotations with it, but these types of loans help avoid a realized capital gain while also leaving your money invested, working for you. Again, talk with an advisor before considering.
9. Donation Techniques
For the charitably inclined, gifting low-basis stock effectively allows one to give more (in comparison to cash) because you are also getting rid of an impending tax liability.
10. Family Gifts
Often a college planning technique we deploy, gifting stock or low-basis investments to kids (who are making less money, and are therefore in a lower tax bracket) can be a way to transfer a portion of a tax liability tax-free. Be weary of the "kiddie tax", however, and consult a professional before doing so.
LTCG Tax Details
7% Tax on Gains Over $250,000
Gains realized over $250,000 for individuals, married couples, and those in domestic partnerships will be taxed at 7%. Key point: the exclusion of $250,000 does not double for married couples, and those in domestic partnerships, unlike most tax laws (this is not good!).
The sale or exchange of the following assets are exempt from the Washington capital gains tax:
Interests in a privately-held entity to the extent that the capital gain or loss from such sale or exchange is directly attributable to the real estate owned directly by such entity.
Assets held in certain retirement accounts.
Assets subject to condemnation, or sold or exchanged under imminent threat of condemnation.
Certain livestock related to farming or ranching.
Assets used in a trade or business to the extent those assets are depreciable under Title 26 U.S.C. Sec. 167(a)(1) of the internal revenue code or qualify for expensing under Title 26 U.S.C. Sec. 179 of the internal revenue code.
Timber, timberlands, and dividends and distributions from real estate investment trusts derived from gains from the sale or exchange of timber or timberlands.
Commercial fishing privileges.
Goodwill received from the sale of a franchised auto dealership.
The following tax credits are included:
A business and occupation (B&O) tax credit is included for B&O taxes due on the same sale or exchange which is subject to the Washington capital gains tax.
A Washington capital gains tax credit is included for the amount of any legally imposed income or excise tax paid by the taxpayer to another taxing jurisdiction on capital gains derived from capital assets within the other taxing jurisdiction to the extent such capital gains are included in the taxpayer's Washington capital gains.
LTCG Tax Details
Increased Top Federal Rate
Under the current House Democrats plan, the top rate would increase to 25% (up from 20%). The Biden proposal, however, would increase the top rate to 39.6%.
Lower Income Thresholds
Both proposals would catch a broader "swath" of people, as the thresholds for jumping into higher brackets would be lowered.