How to Avoid Capital Gains Tax
Put more of your income into retirement accounts., Open a college savings account., Put your money in a health savings account., Put your assets in a charitable trust.
Step-by-Step Guide
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Step 1: Put more of your income into retirement accounts.
Most reputable retirement accounts are tax-exempt or tax-deferred — that is, you either don't pay taxes on money you put into the account or you only have to pay them once you start withdrawing money from the account after you retire.In either case, capital gains you funnel into a retirement account won't be taxed immediately.
For tax-deferred accounts, though you will eventually have to pay taxes, they will probably be lower than you initially would have had to pay (assuming your retirement income + withdrawals from your retirement account amounts to an income in a lower tax bracket).
Note, however, that most retirement accounts have a limit to how much you can add.
For instance, a traditional 401k has a deposit limit of $17,500 per year. -
Step 2: Open a college savings account.
If you're interested in saving for a child or grandchild's education while simultaneously avoiding capital gains tax, a college savings account is the way to go. 529 college savings plans operate on a tax-deferred basis like many retirement accounts.
As an added bonus, they don't usually have a regular contribution limit like most retirement accounts do.
Instead, they have a lifetime maximum amount — usually at least $200,000., Health savings accounts (HSAs) are just what they sound like — savings accounts that allow people to save for future medical expenses.
Usually, money in these accounts is tax-exempt if it's withdrawn for medical purposes, making these a great choice for people looking to avoid capital gains.
However, HSAs usually have several qualifying conditions that a person looking to open an account must meet.
These usually include:
Having a qualifying high-deductible health insurance plan Not being on Medicare Not being a dependent on another person's tax return. , For someone with a highly-valuable asset subject to appreciation (like, say, a collection of fine antiques), charitable trusts offer a great way to avoid paying capital gains on the sale of the asset.
Generally, in this case, you give the trust your valuable asset, then the trust sells it for you.
Because charitable trusts are tax-exempt, they don't have to pay capital gains taxes on the sale of the asset.
After this, the trust pays you a certain percentage of the cost of the asset each year for an agreed-upon amount of time.
After this, the money left over goes to charity.To be clear, this method may not earn you as much money as you might from selling the asset yourself and keeping all of the money, even after taxes.
However, it does ensure that all of the money from selling the asset is split between you and a charity of your choice, rather than going to the government. -
Step 3: Put your money in a health savings account.
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Step 4: Put your assets in a charitable trust.
Detailed Guide
Most reputable retirement accounts are tax-exempt or tax-deferred — that is, you either don't pay taxes on money you put into the account or you only have to pay them once you start withdrawing money from the account after you retire.In either case, capital gains you funnel into a retirement account won't be taxed immediately.
For tax-deferred accounts, though you will eventually have to pay taxes, they will probably be lower than you initially would have had to pay (assuming your retirement income + withdrawals from your retirement account amounts to an income in a lower tax bracket).
Note, however, that most retirement accounts have a limit to how much you can add.
For instance, a traditional 401k has a deposit limit of $17,500 per year.
If you're interested in saving for a child or grandchild's education while simultaneously avoiding capital gains tax, a college savings account is the way to go. 529 college savings plans operate on a tax-deferred basis like many retirement accounts.
As an added bonus, they don't usually have a regular contribution limit like most retirement accounts do.
Instead, they have a lifetime maximum amount — usually at least $200,000., Health savings accounts (HSAs) are just what they sound like — savings accounts that allow people to save for future medical expenses.
Usually, money in these accounts is tax-exempt if it's withdrawn for medical purposes, making these a great choice for people looking to avoid capital gains.
However, HSAs usually have several qualifying conditions that a person looking to open an account must meet.
These usually include:
Having a qualifying high-deductible health insurance plan Not being on Medicare Not being a dependent on another person's tax return. , For someone with a highly-valuable asset subject to appreciation (like, say, a collection of fine antiques), charitable trusts offer a great way to avoid paying capital gains on the sale of the asset.
Generally, in this case, you give the trust your valuable asset, then the trust sells it for you.
Because charitable trusts are tax-exempt, they don't have to pay capital gains taxes on the sale of the asset.
After this, the trust pays you a certain percentage of the cost of the asset each year for an agreed-upon amount of time.
After this, the money left over goes to charity.To be clear, this method may not earn you as much money as you might from selling the asset yourself and keeping all of the money, even after taxes.
However, it does ensure that all of the money from selling the asset is split between you and a charity of your choice, rather than going to the government.
About the Author
John Edwards
Specializes in breaking down complex pet care topics into simple steps.
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