When you review your wealth plan with your financial advisor and tax professional, it’s important to discuss strategies that could help you avoid paying long-term capital gains taxes. By taking proactive steps, you can potentially reduce your tax liability and maximize your investment growth. Here are some strategies to consider.

Offset Gains with Losses

One of the most effective ways to reduce long-term capital gains taxes is by harvesting losses within your investment portfolio. If you have more losses than gains, you can offset up to $3,000 of your ordinary income each year. Any excess losses can be carried forward to future tax years. This strategy helps to minimize your overall taxable income, which can significantly lower your tax burden.

Donate Appreciated Stock

Even if you’re no longer itemizing deductions, you can still take advantage of charitable donations to reduce your capital gains taxes. Donating appreciated stock to charity is an excellent option. If you donate through a donor-advised fund, you can receive an income tax deduction for the fair market value of the stock while avoiding capital gains tax on the appreciation. This strategy allows you to give back to a cause you care about while keeping more of your investment gains.

Utilize a 1031 Exchange

For those who own business or investment properties, a 1031 exchange can be a powerful tool for deferring capital gains taxes. This strategy allows you to sell a property and use the proceeds to purchase a new property, with the new property taking on the original property’s lower cost basis. The key benefit is that you can keep the money working for you rather than paying it out in taxes.

Hold Assets Long-Term

If you plan to pass appreciated stocks or assets to your heirs, consider holding them until your death. When you transfer assets to heirs, they automatically receive a step-up in basis, meaning the asset’s value is adjusted to the market price at the time of your death. This step-up effectively eliminates any capital gains taxes that would have been owed if the assets were sold during your lifetime.

Gift Appreciated Assets

Another effective strategy is gifting highly appreciated stocks to family members. The IRS allows individuals to gift up to $18,000 per recipient in 2024 without incurring gift taxes. While the recipient will assume the asset’s original cost basis, gifting appreciated assets to family members can help reduce your taxable estate and provide them with the opportunity to manage their own capital gains taxes when they sell the assets.

Invest in Opportunity Zone Funds

Opportunity Zone funds offer a unique tax incentive for investments in economically distressed communities. These funds provide preferential tax treatment, such as deferring capital gains taxes on the invested amount. Additionally, if you hold the investment for at least 10 years, you may qualify for a 0% capital gains tax rate on any new gains. This is an attractive option for long-term investors looking to reduce their tax liabilities.

Strategize Based on Your Tax Bracket

Work closely with your financial advisor to sell stocks during years when your income is lower, as this may allow you to pay 0% in capital gains taxes. Managing your income and selling assets in the right years can make a significant difference in the amount of taxes you owe.

Time Your Move

Some states, like Florida, Texas, and Washington, do not have state income taxes, which can be beneficial if you are planning to move. However, keep in mind that some states may still tax certain types of income, such as dividends, interest, or capital gains. If you’re planning to relocate to a state with no income tax, it’s important to wait until you’ve established residency before triggering any taxable sales that could incur capital gains taxes.

Conclusion

By implementing these strategies, you can reduce your long-term capital gains tax liability and keep more of your hard-earned money working for you. Whether through loss harvesting, charitable donations, or tax-efficient investment choices, taking proactive steps with the help of your advisor can make a significant impact on your financial future.