A Personal Finance Guide

Investments are difficult enough without losing huge portions of your investments to taxes, and capital gains are no exception to taxes. Capital gains are the profits that come from investing in capital assets, such as stocks, bonds, or real estate. If the profit exceeds the purchase price, which is what we all hope for, then the difference between the higher selling price and the lower purchase price is then considered a financial gain to the investor, which is subsequently taxed.

However, there are a few ways to get around paying large amounts of your investments. These are all legal, commonly used, and designed for investors to maximize their investment gain, without losing hard-earned funds to taxation.

The government always wants its portion, but donating is one of the ways around tax requirements. If you bought stocks in the past for 2,000 and the stock is now worth $10,000, you can donate the shares to charity and get a tax deduction of $10,000 without having to declare the $8,000 profit as a taxable gain in capital. This is a common device used by investors, which is offered by brokerages. It’s called a charitable gift trust. You are allowed to donate a block of appreciated stock over a period of years, and the stock is sold by the trust, not the investor. No capital gains tax is applied.

If you’ve made some gains in your stock and you’re in a higher tax bracket, the appreciated stock is going to get hit with some hefty taxes at a higher rate. To bypass this tax, you can transfer the stock to a family member who lives in a lower tax bracket. The gain would be placed on their tax return and, if the tax rate is low enough, they could end up having to pay much less than you would have.

There are some drawbacks to this type of gift. Over $13,000 will eat into your lifetime gift and estate exclusion. Always talk with your retirement or investment broker about this option before acting, and see if it would work to your benefit.

This option is for those who have enough money and already live quite comfortably. If you want to bypass paying any gain taxes at all and you consider your stocks, bonds, and other investments as more of a portion of your will, death is one extenuating circumstance around taxation. It sounds morbid, but it’s one way of keeping the government out of your investments. Your heirs never have to pay income tax on the appreciated value between the time of purchase and your death, which your investments in their entirety to the next generation.

These are just a few of the many ways you can get around paying huge sums to the government. Forbes also has an article that goes into other ways that consumers can get around this form of taxation. As always, you should consult your broker and discuss in greater detail the usefulness of these types of actions. Looking into some of these options can end up saving you a lot of money, and can help keep the government’s hands out of your hard earned cash.