Written by Charlotte Wood (last updated February 21, 2009)
Reducing taxes is always something to look for, especially when it's for money that you earned on a purchase or investment. Fortunately there are ways to reduce this type of taxing on capital gains and consequently save you money. First we'll need to understand exactly what capital gains tax is and then we'll briefly explore how you can reduce that tax.
Capital gains tax is essentially tax on the gain of any kind of investment like a stock, bond, house purchase or something of the like. The government likes to tax whatever extra you receive so you need to figure out how to work your way around that. The biggest way you can reduce your capital gains taxes is by using your home equity. When you sell your home, technically that's capital gain, but by itemizing that on your taxes, your gain from the house is excluded for up to $250,000 (for a joint filing, it's up to $500,000). Initially these exclusions sound like they'd be great, but depending on how long you've owned your house, it may not be that great of a deduction.
You need to make sure you know the basis value of your home. That is either the price you paid for it initially or how much it cost you to build it. Once you know that, you can then calculate your profit (i.e. the taxable gain on your house). Unfortunately home equity may not completely exclude you from capital gains tax, but it might.
With stocks and bonds you can donate the stock or bond to a charity and by itemizing that on your taxes you won't have to pay taxes on it at all. The government won't tax the charity and because you gave a charitable donation, you won't be taxed on that money either—score!
Capital gains tax is sometimes so frustrating and honestly, it's really hard to avoid. When you make money, the government wants to know and wants a part of it. It's a fact of life. Take all the measures you can to reduce that tax, but do know that you may not and you might just have to end up paying taxes anyway.
Capital gains tax is one of those terms you probably don't understand, but one you probably should if you want to go into ...Discover More