Investments are difficult enough without losing huge portions of your investments to taxes, and capital gains are no exception to taxes. Capital gains are the profits that come from investing in capital assets, such as stocks, bonds, or real estate. If the profit exceeds the purchase price, which is what we all hope for, then the difference between the higher selling price and the lower purchase price is considered a financial gain for the investor, which is subsequently taxed. However, there are a few ways to get around paying large amounts of your investments. These are all legal, commonly used, and designed for investors to maximize their investment gain, without losing hard-earned funds to taxation.
“The government always wants its portion, but donating is one of the ways around tax requirements,” said Charles Bulger from RetirementCalculator.com. If you bought stocks in the past for 2,000 and the stock is now worth 10,000, you can donate the shares to charity for a tax deduction of 10,000 without having to declare the 8,000 profit as a taxable gain in capital. This is a common device used by investors called a charitable gift trust, which is offered by brokerage firms. You are allowed to donate a block of appreciated stock over a period of years, and the stock is sold by the trust, not the investor. No capital gains tax is applied.
If you’ve made some gains in your stock and you’re in a higher tax bracket, the appreciated stock is going to get hit with some hefty taxes at a higher rate. To bypass this tax, you can transfer the stock to a family member who ranks in a lower tax bracket. The gain would be placed on their tax return and, if the tax rate is low enough, they could end up having to pay much less than you would have. There are some drawbacks to this type of gift. Over 13,000 will eat into your lifetime gift and estate exclusion. Talk with your broker about this option, and see if it would work to your benefit.
This option is for those who are not relying on investment for financial support. If you want to bypass paying any gain taxes, consider your stocks, bonds, and other investments as one portion of your will. Death is one extenuating circumstance around taxation. It sounds morbid, but it’s one way of keeping the government out of your investments. Your heirs never have to pay income tax on the appreciated value between the time of purchase and your death, which your investments in their entirety to the next generation.
These are just a few of the many ways you can get around paying huge sums to the government. Forbes also has an article that goes into other ways that consumers can get around this form of taxation. As always, you should consult your broker and discuss in greater detail the usefulness of these types of actions. Looking into some of these options can save you a lot of money, and can help keep government hands out of your hard earned cash.
Derrik Hubbard, CFP says
If you give/tithe on a regular basis, donating appreciated stock is a good way to replace it.
For example, if I give $10,000 per year to my church, I could give the $10,000 appreciated stock instead as my giving for the year. This frees up my $10,000 giving into my own cash flow for personal purposes and does not reduce that year’s tax benefit.
K Anderson says
If in 2000 I bought a house for 82,000 and sold it in 2011 for 77,000, do I still have to pay capital gains tax even though I received a check for 25,000 due to equity?