By Frank Legan

Chuck Norris once said, “Between income taxes and employment taxes, capital gains taxes, estate taxes, corporate taxes, property taxes, Social Security taxes, we’re being taxed to death.” He has a point! Although generally we can’t avoid being taxed, there are some strategies to help us mitigate and manage our tax obligations. As markets fluctuate, not everyone thinks about the taxes we might pay with the rise of our portfolio or home value—but we should.

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. Let’s dive in.

1. Tax-Deferred Accounts

Saving for retirement is one way to avoid taxes on capital gains. Investment gains in a Traditional 401(k)/IRA do not trigger capital gains. You only pay taxes when you withdraw money from your traditional retirement accounts. In this case it’s taxed as ordinary income. A Roth 401k/IRA, on the other hand, allows you to withdraw your money tax-free, as long as you are 59½ and have held the Roth for more than five years. 

2. Gains & Losses

Some of your investments may lose value, which provides an opportunity for tax loss harvesting. 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 your losses are greater than your gains, then you can use up to $3,000 of loss carry forwards in future years. (2) And of course, there are state taxes as well. Not every state has a state income 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 last in, first out (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. 

3. 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 state taxes on the property. Anything over the exclusion amounts will incur federal and state taxes.

We Are Here to Help

You don’t have to be “taxed to death.” And you don’t have to make sense of this complicated topic on your own. We at Cedar Brook Group are here to help you navigate all your options when it comes to mitigating capital gains taxes—taking into consideration your unique circumstances regarding your sales, cost basis, and length of time of ownership.

We’d like to offer you a complimentary, no obligation meeting where we will discuss your questions, concerns, and goals, as well as our process in working with clients so we can see if we’d be a good fit. To get in touch, call 440-683-9213 or email flegan@cedarbrookfinancial.com. I look forward to hearing from you soon.

About Frank

Frank Legan is Partner, Financial Advisor, and member of the Investment Committee at Cedar Brook Group, one of the largest independent wealth management firms in Northeast Ohio. Frank spends his days designing and implementing personalized financial planning strategies for corporate executives, closely held business owners, artists, families, and retirees. He specializes in lifetime income strategies, investment advice, and estate planning services. He also works with businesses to develop strategic and succession planning strategies. Frank has a Bachelor of Arts degree in Political Science from the University of Dayton, as well as a Master of Public Administration degree focused on municipal management from Cleveland State University. Prior to joining Cedar Brook Group, Frank was a financial advisor in the private client group at Merrill Lynch and with NatCity/PNC Investments. Frank is active in his community, serving on various councils, boards, and committees. When he’s not working, you can find Frank spending time with his wife, Laura, their daughter, Reese, and their beloved collie, Charlie. Frank and his family are volunteers at St. Francis of Assisi church in Gates Mills. Frank serves as Chairman of the Board of Directors for Catholic Charities Diocese of Cleveland. To learn more about Frank, connect with him on LinkedIn.

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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