No one likes to pay taxes, especially on an appreciated investment.
With careful planning, you could avoid or minimize capital-gains taxes. Here are three tips.
Hold investments for at least 366 days
How long you keep investments in your portfolio before selling them determines the taxes you pay on your gains. Short-term capital gains are taxed as ordinary income. Long-term capital gains are taxed at rates of 0%, 15%, or 20%, depending on your tax bracket.
Invest in a low-turnover fund
Mutual funds realize capital gains just as individual investors do. Any time your fund sells a security at a gain, that gain is taxable. Since the law requires mutual funds to pass most of their net gains on to investors, you realize a capital gain. This is either long-term or short-term, depending on how long the mutual fund held the securities. You can avoid these types of gains by investing in a low-turnover mutual fund.
Use capital losses to offset capital gains
Do you have a losing investment in your portfolio? You might want to sell it and use the loss to offset gains. For example, if you have $4,000 in capital gains, and you take a $4,000 capital loss, the two will negate each other, and your tax liability on the gains will be eliminated.
Plus, if your investment losses for the year exceed your gains, you can use the balance to offset your ordinary income, up to a $3,000 limit.