7 Strategies to Reduce Taxes When Facing a Long-Term Capital Gain – When it comes to selling a business, real estate, or any other large asset, many people don’t realize the significant tax implications until it’s too late. A unique life event like this—where there’s suddenly more income than usual—can create a hefty tax burden if not planned for properly. If you find yourself in this situation, don’t worry; there are effective strategies you can employ to reduce your tax liability. Let’s dive into seven strategies to help you keep as much of your money as possible.
1. Leverage Tax Loss Harvesting
One of the most effective strategies is to look at your other investments, especially those that haven’t performed well. If you have assets like stocks or real estate that have decreased in value, you can sell them to realize a loss. This loss can then offset the gain from your major sale, reducing the overall taxable amount. This approach is known as tax loss harvesting. However, remember that the IRS only allows you to take $3,000 of that loss annually, so it’s important to consider timing and overall portfolio strategy.
2. Maximize Contributions to Tax-Advantaged Accounts
Another way to reduce your tax burden is by making additional contributions to tax-advantaged accounts like retirement plans. In certain situations, you can increase your contributions significantly in the year of the gain. For example, some investments, such as certain oil and gas partnerships, allow you to contribute more in high-income years. This approach provides flexibility, enabling you to make larger contributions only when it’s most beneficial.
3. Gift Appreciated Assets
If you have assets that you plan to pass on to your children or grandchildren, consider gifting them instead of selling. When you gift appreciated assets, the recipient receives a “step-up in basis,” which means they inherit the asset at its current market value, not the original purchase price. This can eliminate the capital gains tax you would have paid if you had sold the asset yourself.
4. Consider a Charitable Remainder Trust (CRT)
A CRT allows you to transfer appreciated assets into a trust, which then pays you (or another beneficiary) income for a set period or for life. After that, the remaining assets go to charity. This strategy can reduce or eliminate the capital gains tax on the sale of the asset, while also providing an income stream and fulfilling your charitable goals.
5. Invest in Opportunity Zones
Opportunity Zones are economically distressed areas where new investments may be eligible for preferential tax treatment. By reinvesting your capital gains into an Opportunity Zone Fund, you can defer the tax on those gains until the earlier of the date you sell your investment or December 31, 2026. If you hold the investment for at least 10 years, you may even avoid paying tax on the new gains.
6. Use Installment Sales
An installment sale allows you to spread the capital gain over several years, which can reduce your tax burden in any single year. By receiving the proceeds over time rather than in one lump sum, you might stay in a lower tax bracket and pay less in taxes overall.
7. Hire Family Members
If you own a business and are selling a portion of it, consider hiring your spouse or children. You can pay them a salary, which allows them to contribute to their own retirement accounts. This not only reduces your taxable income but also helps you save more for retirement.
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