To return the portfolio to its original allocation percentage, you must either sell positions that are performing well or purchase those that are under-performing. This is where potential capital gains come in. One way to avoid paying capital gains taxes is to divert your dividends.
Instead of taking your dividends out as income to yourself, you could direct them to pay into the money market portion of your investment account.
Then, you could use the cash in your money market account to purchase under-performing positions. This allows you to re-balance without having to sell an appreciated position, generating capital gains. You could also reduce your capital gains tax by investing in your retirement accounts and other tax-advantaged accounts, such as Roth IRAs, Roth k s, HSAs and plans. Additionally, you can place money into qualified retirement accounts, such as traditional IRAs and k s, that give you immediate tax advantages.
However, you could face capital gains taxes on your earnings when you withdraw the money years down the road. But contributions you make to these accounts reduce your taxable income for that year. Because contributions to your IRA and your k could bring your taxable income below that threshold, this could be a viable strategy for reducing or eliminating capital gains taxes. One of my favorite ways to avoid paying capital gains taxes is a strategy called tax loss harvesting.
Essentially, this is where you sell investments at a loss to offset gains from other investments. For instance, you may not need to sell losing stocks every year. In this case, you can deduct the difference as a loss on your tax return. Single filers. Long-term capital gains tax rate. Your income. Married, filing jointly. Head of Household. Married, filing separately. How capital gains are calculated. Watch out for two things. How to minimize capital gains taxes. Hold on.
Exclude home sales. Rebalance with dividends. Use tax-advantaged accounts. Carry losses over. Consider a robo-advisor. On a similar note Furthermore, if the proceeds of the tax are used to finance current consumption, as they mainly are in the Biden proposal, the result will be a permanently smaller capital stock. That means slower economic growth and lower incomes for our children.
High rates are even worse. As Lawrence Lindsey noted recently, the proposed Biden rate goes beyond the level that would raise the most revenue. At higher rates, the government actually gets less money.
But even when a moderate capital gains tax is raising funds for the government, there are far less harmful ways of meeting the same revenue objective.
This is a BETA experience. You may opt-out by clicking here. More From Forbes. Nov 9, , pm EST. Nov 9, , am EST. Nov 8, , pm EST. Nov 8, , am EST. Nov 7, , pm EST. Nov 7, , am EST. Home taxes tax planning. Temporarily unemployed. A self-employed person and your income varies from year to year. Between the ages of 60 and 72 and retired, before you start taking required minimum distributions. Some Things to Watch Out for Before you use this strategy be sure to check to see if you have any capital gains distributions that may pay out on mutual funds that you own in taxable accounts.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. About the Author. He works directly with clients on retirement and estate planning, portfolio management and insurance needs. Most Popular. Tax Breaks.
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