Investment Tax Brackets

7 Ways to Beat Capital Gains Taxes [Saved $1.2 Million]

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Save thousands on capital gains taxes with seven secret tax tricks

Death and Taxes, the only two certainties in life but only one should be something you worry about.

In this video, I’ve got seven strategies to beat capital gains taxes and lower your total tax bill. In fact, working private wealth planning years ago, we were able to save one client over $1.2 million in taxes using these exact seven steps.

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What the Rich Know about Saving Money on Taxes

Nation, working in private wealth planning I realized fast that it wasn’t the big double-digit returns that mattered most. The millionaires I worked with wanted those returns but the very first question they always asked my team…how much can you save me on taxes?

That’s the number one, most important thing for any investor and it doesn’t matter whether you’ve got a hundred dollars invested or a hundred million.

For example, I remember one client with an income of roughly seven million dollars and this was 2014 so we’re talking a top tax rate of almost 40% and a $2.7 million tax bill just on the income, not including capital gains taxes and other investment income.

By using the very ideas I’ll share with you in this video, we were able to knock $1.2 million off that total tax bill. This was by using some very easy tax planning ideas like tax loss harvesting which lowered his capital gains tax to almost zero, shifting his highest cash flow investments into tax deferred accounts and taking full advantage of business expenses.

Everything You Need to Know about Investment Taxes

Now I wanted to make this video a one-stop for everything taxes so we’re going to start with some tax 101 basics like how investments are taxed, capital gains and some investments you can use to never pay taxes. I’ll then reveal those seven tax saving ideas that are going to save you money.

So the first question here is, How are Investments Taxed, and we’ll see there are actually three different types of investment taxes.

What are Capital Gains Taxes?

The first here is the big one, capital gains taxes. Buy low, sell high means you made money and Uncle Sam wants his cut. You owe taxes whenever you sell an investment for a profit. This goes for anything from stocks to bonds, real estate, anything, but the taxes you owe are going to depend on two factors, how long you held the investment and your income level.

Any investments you hold for less than 365 days, so you buy a stock on March 15th and sell it before March 15th of the next year, these are taxed as short-term capital gains. Short-term gains are just added to your regular income and taxed at those rates.

Now this is potentially a very high rate. We see here the 2020 income tax brackets and those top earners, individuals making over $518,000 a year or married couples making over $622,000 are paying 37% of the money they make over that, they’re paying that in taxes.

For example, if you not married and make $150,000 a year, you’re going to be losing 24% of your short-term profits to taxes. If you’re married and making $340,000 jointly, your rate is that 32% level.

On the other hand, if you hold your investment for longer than 365 days, any profits are taxed at a special rate as long-term capital gains.

Here’s the table for those rates and again, your rate depends on income. For individuals making less than $40,000 or couples making less than eighty, you pay no capital gains taxes.

Investment Tax Brackets
Investment Tax Brackets

Now that’s a hugely important point so I want to repeat it. If you’re making less than eighty-grand a year, and this is your adjusted income so you get those standard deductions and the limit here is actually about a hundred grand, but you’re paying nothing in long-term capital gains taxes.

Your tax rate on these long-term profits goes up to 15% or 20% if you make more but never as high as those income tax rates.

So just right here, you see the huge importance of planning. Anytime you sell a stock, you need to be thinking, Have I held this for at least 365 days? Now that doesn’t necessarily mean you can’t sell stocks you hold for less than a year, there are reasons to sell a stock no matter what the tax bill, but if you can hold your winners for at least that one-year period, you’ll end up saving thousands in taxes.

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How are Dividends Taxed?

A second type of investment taxes are on dividends and these also fall in two different categories; qualified versus non-qualified dividends.

I know the IRS isn’t making it easy with all the different levels but this one is easy to remember because it’s a lot like those capital gains taxes.

Qualified dividends are when you hold the stock for at least 60 days around that dividend payment. Now that 60-day clock can be before or after the dividend, so if you hold the shares for 59 days before the ex-dividend date and then through that day, you get that special qualified dividend tax rate.

The taxes you pay on these qualified dividends are the same as the long-term capital gains. Remember though, you pay taxes on dividends you collect each year, not just when you sell the stock. So any dividends you receive, if you hold the stock for at least 60 days around that dividend, you’re going to pay either 0%, 15% or 20% next April depending on your income.

Non-qualified dividends, so if you receive a dividend on a stock and do not hold the shares for at least that 60-day period, these are going to be added to your income and taxed at your regular income rates. Again, potentially much higher taxes so you need to think long and hard about selling dividend stocks if you haven’t held them for more than two months.

So we need a special note here, anytime you own shares of foreign companies that pay dividends, your broker is going to withhold a portion of those dividends for foreign taxes. You’ll see this amount reported on your annual tax statement and you can usually take that amount off your U.S. taxes owed.

Taxes on Interest Income

One last type of investment taxes here before we get to a special type of investment where you might never owe taxes and then those seven ways to lower your tax bill. Here we’re talking about taxes on interest income.

Interest income is paid on a few common investments including savings accounts, CDs, bonds and peer-to-peer lending. Anytime you get interest from one of these, even if its just a few bucks, you’ll get a 1099-Interest form and will owe taxes.

Now interest income is taxed as regular income and there’s no way to get lower long-term rates on these so the rate you pay could be up to that 37% top level. So here one of those seven strategies we’ll talk about, using tax-deferred accounts, is going to be super-important.

Taxes on MLP Investments

One last special type of investment I want to point out before those seven strategies and I bring this one up because it’s such a huge opportunity that’s too often avoided by investors. Here I’m talking about master limited partnerships or MLPs. These are special companies, usually holding oil & gas pipelines, that pay out the majority of their profits as dividends.

So with MLPs, you’re going to be getting dividend yields as high as 12% but there’s also a huge tax break built into these things. The majority of your dividend isn’t technically a dividend, it’s counted as a return of your investment. That means you don’t pay taxes every year on it like other dividends AND, and here’s the best part, if these investments pass through your estate, so your heirs get them, they never have to pay taxes on those dividends you collected.

7 Tax Tricks to Save on Investment Taxes

Now on to those seven strategies to save on your taxes and thank you for sticking around with me. I think, more than just knowing these seven tax strategies, knowing the tax basics is very important so I wanted to include it in the video.

Tax Loss Harvesting

Our first tax savings tip is called tax loss harvesting and with this one, you can even lower your regular income taxes.

The IRS allows you to offset your capital gains with losses. For example, if you sell a stock and made $500 total profit but you sell another stock and had a $500 loss then they would cancel out and you would owe nothing for capital gains tax.

Since there are two types of capital gains, short-term and long-term, there are two types of tax loss harvesting here. All your losses on long-term investments go to offset gains on long-term investments first. If there are losses left to recoup, then they are applied against any short-term gains. The remainder, whether it’s a long-term or short-term gain or loss, is applied to those tax rates we talked about earlier for your tax bill.

What’s even better here though is that if your losses totally wipe out gains, you can take up to $3,000 in losses against your regular income in a year. For someone at that 37% tax rate, that’s going to save you over a grand in regular income taxes.

Now, you can only write off your income that max of $3,000 in losses in any single year but if you have more, say you got sucked into Bitcoin and sold at a loss of $20,000 – then you take $3,000 of it to lower your income this year and carry the other $17,000 into next year to offset against any capital gains you report.

So putting this in a strategy, what you want to do is towards the end of each year, look through your investments and calculate up the unrealized profits and losses. Then you strategically sell out of investments. If you’ve already booked some profits from stocks you sold, then maybe you look for a few losers to sell to offset those gains you’d have to report.

Nobody likes taking a loss on an investment but this strategy at least makes a little lemonade out of the lemons.

And selling a losing investment doesn’t mean you can’t get back in and enjoy an eventual rebound. The IRS says you cannot buy the same or identical investment within 30 days of taking that tax loss but you can always wait the 30 days and get back into the same stock. What I like to do is selling the stock, investing the money into the sector ETF so I still get the upside from similar stocks in that same sector, then I can invest the money back into the same stock if I want in 30 days.

There’s a lot to keep track of on this and a lot of the other strategies we’ll talk about but just about any tax software is going to make it easy. I use TurboTax because it’s got the features I need for a home business and investments.

The software makes it really easy reporting different investments, losses and gains on each and keeping track of everything. TurboTax is free to file Federal and State and you can start for free, only paying after you see how much you’ll get back. Start your taxes free with this link.

Saving Taxes with Retirement Accounts

Another great tax strategy, and everyone in the nation has heard me talk about this one, is putting your cash-flow investments in retirement accounts.

Anything that returns a cash flow during the year, you’re going to owe taxes on that and you need to protect it. For example, take a look at this chart. If you invested $5,000 into two accounts. One invested in dividends for an 8% annual cash return with taxes paid each year on those dividends. The other account, same 8% annual return, but no taxes until you withdrew the money in 30 years….it’s a ten-thousand dollar difference!

Tax Tricks to Save Money
Tax Tricks to Save Money

You need to keep those dividends in your account, earning more money for you, not paying a chunk each year to Uncle Sam!

The same goes for interest income investments like bonds and peer-to-peer lending, actually even more so since these are taxed at higher income rates. So any kind of a cash flow investment needs to be invested through an IRA or Roth IRA account.

We’ll talk more about these types of accounts later but this is where those dividend stocks need to go. Since you’re limited to investing $6,000 into these accounts each year, you should prioritize the investments you buy with that money.

If you’re investing in individual bonds or peer-to-peer lending, so those interest income investments, those should be your top priority into an IRA. If you’re only investing in dividend stocks, not any of those interest investments, then put your highest yielding stocks in your IRA.

Even at the lower tax rate of 20% on qualified dividends, if you earn let’s say a yield of 6% a year on dividend stocks and put those into an IRA, you’re saving $72 a year and able to make money on that money every year until retirement.

Business Deductions for Taxes

Our third tax strategy, and this is going to be one of the biggest, is to take advantage of business deductions.

Now this one is going to be more complicated but if you want to know, THIS is where the rich really make their tax savings.

You don’t need to create a formal company or anything like that. If you’re selling a product or some kind of service, or you just have an online business with a website, all your income and expenses will flow through your own personal income taxes.

You’ll put all your sales and expenses on Schedule C of your taxes, again this is easy to do with any tax software like TurboTax, and there are a lot of expenses you can take that can zero out your business taxes and even save you money on regular income taxes.

Some examples here are trips you take where you work on your business. Any advertising or marketing you do for your business. Office equipment, your laptop or any other supplies. You can even take a portion of your home utilities and property taxes off as an expense if you work from home.

Some of the best expenses are being able to write off part of your vacation costs if you do a little work while you’re out. Taking some of your car costs off your income if you use it for work.

Obviously this isn’t something to do ONLY for the tax break but turn that hobby into a small side hustle, make a little extra money and you can actually save taxes on your other income too.

That’s because a lot of times, your expenses might be more than your sales for the year. Those expenses will also go against your regular income to lower your taxes there and if you don’t owe any taxes this year, you can even get a refund of taxes paid on the last two years if you paid any.

The IRS generally says you need to make a profit in three out of five years for it to be considered a business but if you’re genuinely trying to run it, even just a few hours a week, you can really save a lot of money here.

Tax Tricks with Real Estate

One of my favorite ways to save on taxes and this is one of the biggest for the wealthy, real estate depreciation.

As your income grows and you get into those higher tax brackets, investing directly in real estate starts making more sense because of the huge depreciation writeoff.

Depreciation is just an estimate of the lost value in an asset over time. They say that things like computers, cars and even real estate loses its value because it’s not going to last forever. The IRS says you can take the value you paid for one of these assets, spread it over 27.5 years for residential property or 39 years for commercial property, and take that amount off your income each year to compensate for the supposed lost value.

So for example, if I paid $300,000 for a rental property and the land value is estimated at $75,000 for property taxes. The building is worth $225,000 for taxes. That’s an important point, you don’t depreciate land, only the building value.

So I divide that $225,000 by 27.5 years which is the useful life estimate for residential real estate, so $8,181 in depreciation expense I can take off the rental income each year. That means I take my gross rent, minus all expenses and minus this $8,181 a year and that is the amount I report as income and pay taxes on.

So if you’re in that 37% tax bracket, being able to take that $8,181 a year in depreciation is going to save you over $3,000 a year in taxes. And remember, depreciation isn’t actually something you pay. That property isn’t really dropping in value, in fact the value is probably increasing a little. Depreciation is just an accounting trick the government allows and means real estate is one of the best ways to avoid taxes.

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Saving Taxes with an IRA

An easier tax saving for a lot of people is going to be to take advantage of an IRA or Roth IRA.

We touched on this on earlier and it’s gotta be on everyone’s list to save on taxes. These are two special investing accounts with huge tax benefits. You get to take any money deposited into an IRA off your current year’s income, so an immediate tax break, and never pay taxes on gains or dividends until you withdraw the money.

With a Roth IRA, you pay your taxes on the money you invest now but you never pay taxes while the money is in the account or when you take it out in retirement.

Listen to that last part because it’s why I love Roth IRAs and why everyone should use them. Unlike an IRA account where you pay taxes on everything you withdraw, you never pay taxes on your returns from a Roth account. You already paid taxes on the money you deposited so of course that comes out tax free but all the money you made on investments…completely tax free forever!

Saving Taxes with a 401K

As great as the IRA accounts are, you can save even more taxes by investing in a 401K account.

I love my IRA accounts but you can only protect about six grand a year from the tax man. Protecting more of your income means using a 401K, either one from your employer or a solo 401K you set up for your own business.

You can contribute up to $19,500 from your income into a 401K each year and your employer can match some of that for up to $57,000 in combined contributions. That saves a lot of money come tax time and can mean a lot of small businesses owners won’t pay anything in taxes.

Definitely look into your company’s 401K match program if they have one and if you start that side hustle like we talked about earlier, you can open a solo 401K on an investing site like ETrade to contribute as a business owner and an employee.

Saving Money on Taxes with an HSA

One of the least used tax breaks are special savings accounts like the Health Savings Account, HSA, and the Flexible Spending Account, or FSA.

I love these because it’s money you’re spending anyway so why not get a tax break on it? A health savings account can be set up through work or most banks and is pre-tax money you deposit to cover medical expenses. You earn interest on the money you deposit and it comes out tax-free to pay for those expenses.

The trick for an HSA is you have to also have a high-deductible health plan, an HDHP, which is just health insurance with a minimum deductible of $2,700 for a family plan. The upside here is these plans are usually much cheaper than other insurance because of that higher deductible. So not only are you saving money on taxes by not paying income taxes on the money you spend for medical costs, you also save on your insurance.

A flexible spending account, or FSA, is a lot like the HSA but can also be used to pay for child care costs. You can deposit up to $2,750 a year into your FSA, take that amount off your income so you’re not paying taxes on it, and use that for child care expenses.

While money in an HSA keeps earning interest and growing until you need it, you do need to use any FSA funds during a year period but there are a lot of approved expenses so it’s never been a problem for my family.

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You can beat capital gains taxes but it takes some planning and tricks most investors don't know. Save as much as you can in retirement accounts and special savings accounts and learn the tax tricks to keep more money.

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