Capital Gains Tax Planning for Houston Businesses and Individuals
Capital gains tax planning services take a longer, down-the-road look at your tax situation, specifically as it pertains to capital gains taxes. Capital gains taxes are incurred whenever an individual or business sells a capital asset and realizes a profit. The definition of a capital asset is quite broad and includes the following:
- Real estate
- Equipment (such as manufacturing or production machinery)
- Furniture, computers and other assets necessary for business operations
- Vehicles
- Securities and other investment properties (stocks, mutual funds, bonds, etc.)
- Certain intangible properties like patents, copyrights, trademarks and goodwill
Any of these properties may be taxed if they are sold off, and minimizing those capital gains taxes is a goal for many. Tax planning experts can identify (and implement) the ideal mix of strategies to minimize tax liabilities and ensure investors maximize their profit with each transaction.
Six Proven Capital Gains Tax Planning Strategies
Capital gains taxes can be reduced through many strategies. Some of the most effective strategies include:
Holding capital assets for the longer term – Capital gains are taxed according to two factors, the taxpayer’s tax bracket and the length of time the asset is held. Short term capital gains are those held less than a year and long-term capital gains are realized on any asset held for more than a year. Short term capital gains are taxed at the taxpayer’s income tax bracket (so between 10 and 37 percent depending on how much income you earn). Long term capital gains are taxed less, running from 0 percent (for single-filing taxpayers earning up to $48,350 annually) to 20 percent.
If you can defer the sale of a capital asset until it shifts from short-term to long-term, you’ll save thousands in taxes off the top.
Offsetting capital gains by harvesting losses – The IRS allows taxpayers to use capital losses (underperforming investments) to offset gains in other parts of their investment portfolio. Calculated liquidation of both overperforming and underperforming assets can zero out your capital gains taxes, and capital losses can even be used to offset standard income by up to $3,000. Any excess losses can be carried forward to future tax years.
Funding tax-advantaged retirement accounts – Some retirement vehicles provide tax advantages, allowing taxpayers to reduce their overall capital gains tax burden. For example, with a Roth IRA, you fund the account with after-tax dollars, so you pay the taxes up front. However, any gains accumulated in the account are not taxed and withdrawals are tax-free, as long as you meet all qualifications.
This is just one example, but there are several types of retirement vehicles that can be used to hold capital assets and reduce capital gains taxes in the process.
Leverage charitable giving and its tax benefits – Many appreciated capital assets can be donated to a qualifying charity and written off as a tax deduction. The deduction is equal to the asset’s full market value, and you are not liable for capital gains taxes in the process. Alternatively, taxpayers can also set up a charitable remainder trust (CRT) that can be funded with capital assets. Any assets inside the trust can be liquidated without an immediate gain, which avoids triggering a capital gains tax. CRTs also allow taxpayers to claim a tax deduction when funding the account and CRTs pay the grantor a steady income through distributions, which may then be taxed. When the trust’s last remaining beneficiary passes away or the trust’s term expires, the remaining assets are donated to the charity. CRTs are ideal for taxpayers who want immediate tax benefits, a steady income and a desire to leave a philanthropic legacy.
Time capital gains with your income – If you’re expecting a lower income during the current tax year, it may make sense to accelerate the sale of any capital gains. If you’re in a low tax bracket to finish the year, selling short (or long) term capital assets will come with a lower capital gains tax bill.
Utilizing 1031 like-kind exchanges – 1031 like-kind exchanges allow real estate investors to essentially exchange one “like kind” property for another instead of liquidating a property and paying capital gains taxes on it. The 2017 Tax Cuts and Jobs Act limited this to real estate only, but it can greatly slash an investor’s capital gains tax burden. 1031 like-kind exchanges are essentially designed for investors who intend on reinvesting their gains right back into another real estate property, you just skip the part of the process where the capital gains tax is triggered.
Why a Tax Expert is Recommended to Manage Your Capital Gains Tax Planning
There are numerous capital gains tax reduction strategies, and the above list is just a general overview. For taxpayers with significant capital assets, it can be a challenge arranging everything for maximum tax benefits. This is one reason why individuals and businesses work with tax planning experts to develop their tax-reduction approach. Here are two more reasons why partnering with an experienced tax planning professional is recommended:
Deep knowledge of the tax code – The IRS internal revenue code is notorious for its complexity, to the point where businesses employ people specifically for their knowledge of tax law. By partnering with your own tax expert, you’ll have access to the full breadth of tax planning strategies. A tax expert can also customize the right tax planning approach for your situation, ensuring maximum tax benefits.
Future-minded tax avoidance – The tax code changes constantly, and your tax planning strategies will have to be executed on time and on point to prove their benefits. By partnering with a tax planning professional, you’ll have advance notice of any impending changes to tax laws which may affect your situation. Further, a tax professional will be mindful of all deadlines and other procedural requirements, ensuring everything is filled out and submitted on time.
Capital Gains Taxes Can Be Burdensome, but a Tax Planning Expert Can Reduce That Burden
If capital gains aren’t properly managed, you could be on the hook for a large bill come tax time. Of course, it doesn’t have to be that way. Partner with a reputable tax planning professional so you’ll know when (and how) to liquidate your capital assets to avoid heavy tax liabilities and ensure more of your gains end up in your pocket.
