The explosive move higher for stocks in the past several years
has been great for stock investors, who've seen their portfolios
largely recover from the 2008 bear market. But the IRS wants its
share of your hard-earned investing profits, which means more
taxpayers will have to pay tax on capital gains in 2014.
However, by following a few simple strategies, you can
make sure that you pay as little tax on your capital gains in
2014 as you absolutely have to. Let's look at three of those
strategies and find out how you can pay less to Uncle Sam in the
years to come.
1. In taxable accounts, hold on to your investments for
more than a year
The easiest way to reduce your tax on capital gains is to hold on
to your investments for more than a year. That qualifies you for
long-term capital gain treatment, which includes favorable rates
that are lower than what you'll pay for capital gains on
investments you hold for a year or less. Short-term capital gains
tax rates are the same as your ordinary income tax rate, ranging
up to 39.6%. But for long-term capital gains on most qualifying
investments, the maximum tax is 20% for those in the highest tax
bracket, 15% for those in the four tax brackets from 25% to 35%,
and 0% for those in the 10% and 15% brackets.
Not all assets qualify for
particular preferential rates. Gold and silver bullion, as well
as exchange-traded funds
, are treated as collectibles, for which ordinary income tax
rates apply subject to a higher maximum of 28%. Nevertheless,
structuring your investments to hold them for longer than a year
is the most obvious way to reduce your tax bill on capital gains
in 2014 and beyond.
2. For quick trades, use tax-deferred accounts
Capital gains taxes make it expensive to be a short-term trader
in a taxable account, but that doesn't mean you have to give up
on all your opportunistic trading options. The key to avoiding
capital gains with short-term trades is to use IRAs or other
tax-deferred vehicles to hold those stocks.
The reason is simple: Even when you sell a winning stock in an
IRA, you don't have to pay capital gains tax at that time. What
happens instead is that the proceeds from the sale stay in the
IRA and are available for reinvestment, and you'll only get taxed
when you start making withdrawals from your retirement account.
So if you're looking to take advantage of a short-term
opportunity, such as a spinoff, special dividend, or buyout
offer, buying it in an IRA will avoid a painful tax on eventual
3. Look for capital losses to offset your gains
As in any other year, capital gains in 2014 will be netted
against any capital losses you might have for the year. As a
result, if you foresee selling some of your winning stocks next
year, you should consider selling some of your losing stocks as
well to offset those gains.
Tax considerations should only be part of your decision to
sell a stock, though. If you sell a stock you like just to reap
the loss, you won't be able to claim that loss if you buy the
stock back within 30 days. That can lead to missing out on a
rebound in that stock, forcing you to repurchase shares at a
higher price after the 30-day period ends. Tactics like buying
SPDR S&P 500
or other index ETFs to substitute for an individual stock can
reduce that risk, but nothing can eliminate it entirely. On the
other hand, if you want to get rid of a losing stock for good, it
only makes sense to use the tax loss to your best advantage.
It's easy to be tax-smart about your capital gains in 2014. By
following these three simple strategies, you can make sure you
pay as little tax on your 2014 capital gains as possible.
Be smart about your taxes
Reducing your tax on capital gains in 2014 is just one way you
can help reduce the overall amount you pay to Uncle Sam. In our
brand-new special report "
How You Can Fight Back Against Higher Taxes
How You Can Fight Back Against Higher Taxes," The Motley Fool's
tax experts run through what to watch out for in doing your tax
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has no position in any stocks mentioned. You can follow him on
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