Finance
Good news for savers, find out how to avoid capital gains tax 2024
By taking proactive steps to manage your capital gains, you can potentially save thousands of dollars in taxes.
Tax avoidance is the legal practice of arranging your financial affairs to minimize tax liability while staying within the boundaries of tax laws. This is fundamentally different from tax evasion, which involves illegal activities to evade taxes.
Tax avoidance can get a bad rap, but there are plenty of legal, and encouraged, ways of doing so. A prime example this is the Biden administration’s electric vehicle (EV) tax breaks. One of these, the $7,500 electric vehicle tax credit, shows how governments encourage people to avoid tax in some cases.
Capital gains tax applies to the profit you make from selling an asset, such as stocks or property. In the United States, the tax rate depends on how long you’ve held the asset and your income level. If you sell an investment within a year of buying it then you are subject to a 37% tax rate.
Howevern, this can be much lower with a bit of patience.
Strategies to avoid capital gains tax
One of the simplest ways to reduce your tax burden is to hold your investments for more than a year. This qualifies you for long-term capital gains rates, which are significantly lower than short-term rates.
These are the rates you will pay for realising the tax in 2025:
0% Rate:
- Single filers: Up to $48,350
- Married filing jointly: Up to $96,700
- Head of household: Up to $64,750
15% Rate:
- Single filers: $48,351 to $533,400
- Married filing jointly: $96,701 to $600,050
- Head of household: $64,751 to $566,700
20% Rate:
- Single filers: Over $533,400
- Married filing jointly: Over $600,050
- Head of household: Over $566,700
As you may notice, every band of the tax is also less than the income tax rate earning the same amount.
If you’ve sold your primary residence, you may be eligible for a significant tax break. Single homeowners can exclude up to $250,000 of capital gains, while married couples filing jointly can exclude up to $500,000. To qualify, you must have owned and used the home as your main residence for at least two of the five years before the sale.
For those with investment properties, a 1031 exchange allows you to defer capital gains taxes by reinvesting the proceeds from the sale into a similar property. This can be a powerful tool for real estate investors looking to upgrade their portfolio without incurring immediate tax liabilities.
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