How To Calculate Your Capital Gains Taxes Easily
How are capital gains taxes calculated? What can be done to lower and minimize taxes when making new investments and restructuring portfolios today?
Making sense of taxes is like brain surgery for the average patient, and Einstein level time theory even for brain surgeons. Unless you wrote the tax code, or you are an experienced CPA by profession, it’s just complicated, right? It’s supposed to be. The more complicated it is; the less likely people will actually be to claim the right breaks, and they’ll end up overpaying. Trump has promised to change all this. We’ll see how far he gets. In the meantime, that leaves individual taxpayers, and especially investors trying to figure out the best moves.
It’s That Time of Year Again!
Time to cringe. It’s almost tax time. It’s about as appealing as ‘going under’ for a major operation for most. There are a few savvy investors who enjoy it. They are the ones that have educated themselves, made tax smart investment moves, and who are busy counting up all of their savings and additional profits. Of course, to get to that point you have to get how much you are being taxed now, and what tools can help you slash those tax bills.
Capital Gains Taxes
Capital gains taxes are one of the sneakiest forms of taxation out there. That’s because many, including highly educated and intelligent medical school graduates simply aren’t prepared for them.
Taxes on investment income and profits can be lower than earned income, but only if you structure it right. Basically, a capital gain is the difference between when you buy something and then sell it. For example; you buy and flip a house. You bought it for $100,000 and resold it for $200,000. You have a $100,000 capital gain (minus some other deductions). You generally owe tax on that. The same goes for businesses, medical offices and equipment, stocks, precious metals, and collectibles like art.
Now it is important to know that there is a substantial difference between short and long term capital gains. Short term gains are generally taxed at your ordinary income rate. That can be really high if you are a professional like a doctor, lawyer, or accountant. We’re talking about topping 40%. So, that $100,000 profit you though you made on the above deal is instantly sliced to $60,000.
Fortunately, long-term capital gains are a little more reasonable. There are even some pretty sweet breaks and exemptions for certain scenarios. For example; you can exempt as much as $500,000 in capital gains from taxes on your personal residence if you hold it for at least 2 years. The new PATH Act also provides breaks for investing in through certain structures.
However, to keep it simple what you need to know is that when it comes to Federal capital gains taxes the rates are currently 0%, 15%, or 20%. That depends on which tax bracket you fall into for the year. However, do watch out for a potential 3.8% Medicare surtax, and state capital gains taxes. Note that a few states including TX and FL have no state capital gains taxes. Keep an eye out for the new 2017 proposed changes to tax brackets under the Trump administration.
How to Cut Those Capital Gains Tax Bills
There are several ways to perform a ‘tax-ectomy’ on capital gains taxes due, retain those wins, and more importantly; use those funds to invest and compound your wealth and passive income levels.
One way is to offset gains with previous losses. For example; business write-offs, asset write downs, etc. We’ve all heard of Trump’s nearly $1B ‘loss’ which enabled him to potentially write off years’ of future gains. Or for example; you just bought a new Jaguar F-Pace SUV, realized you should have gone with the Range Rover, or Mercedes S Class, or simply got bored of it after six months. You are likely going to have to sell that at a big loss.
Hopefully we aren’t throwing away money that frequently. So, what are some more strategic and reliable vehicles for legally minimizing this burden? Self-directed IRAs and 1031 exchanges are two of them. These are instruments that the IRS expects you to use to avoid unnecessary taxes. If you aren’t using them – you are overpaying, period.
Self-directed IRAs allow you to rollover existing 401ks and IRAs to retirement accounts that you can direct into more profitable investments like mortgage debt and commercial real estate. You get all the perks of a retirement account for deferring and saving on taxes. You can snowball those gains by reinvesting them.
1031 exchanges allow you to sell real estate assets, and buy others, without paying taxes on the gains. Again; this means injecting additional double digit amounts of capital back into your investment war chest. Real estate in general is also a smart vehicle due to its variety of tax perks like depreciation.
It’s certainly better to make more money, and pay some taxes on it, rather than being paralyzed with fear of taxes. Still, the wise and experienced always prioritize taxes when making and evaluating an investment. Know your numbers, leverage the tools available, get professional and personalized help for making the right choices for your unique situation, and watch your nest egg and passive income grow far faster than before.
For more information check out this free capital gains tax calculator from Money Chimp and check out these capital gains rate quick reference sheets from NerdWallet. For more insight on earned versus investment income and taxes grab a copy of Make It, Keep It: The New Rules of Wealth Preservation for Doctors.
Finally; know that it’s still not too late to make investment moves with retroactive benefits for reducing last year’s tax bill, and your next one too. With the right structure, some individuals could contribute as much as $106,000 to tax saving accounts in the next couple of months, or take advantage of Reverse 1031 Exchanges.
Original article and more can be found at https://www.baluchbulletin.com/how-to-calculate-your-capital-gains-taxes-in-a-few-easy-steps/
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