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5 Capital Gains Mistakes that Could Cost You

5 Capital Gains Mistakes that Could Cost You

What you should know before you sell.

If you’re thinking about selling assets, such as stock, you’d better plan ahead. A little planning now can save you lot of capital gains tax later when you file your return.

Here are some mistakes to avoid and what you can do to keep from paying higher capital gains tax than you should:

Mistake #1

Don’t: Sell at a profit shortly before that profit qualifies as a long-term capital gain.

Do: Plan the sale of an asset that’s gone up in value to be a long-term gain.

The difference in tax rate between a short-term gain and a long-term one can be significant. You’ll kick yourself if you don’t check to make sure you know exactly when you purchased the asset.

Make sure you’ve held an asset that’s gone up in value long enough to qualify for long-term status. For most assets, that’s more than one year.

Don’t be too hasty to sell when the year is up. The IRS says more than one year. If it’s exactly one year, you just made a short-term sale.

Mistake #2

Don’t: Hang on to losing investments, just to avoid taking a loss.

Do: Consider selling assets at a loss to offset capital gains.

If you’re holding good investments because you have faith they’re coming back up in value, that’s great.

If you’re hanging on because you don’t want to admit you lost money, or you feel the investment owes you something, that’s not so great.

When an asset goes down in value, you’ve lost the money, whether you realize that loss by selling or not. If you wouldn’t buy the asset now, you probably shouldn’t keep it.

Besides, if you sell it in a year that you also sold other assets at a gain, you may offset the gains with your realized loss. You could save on taxes and then move on to more profitable investments.

Mistake #3

Don’t: Sell stock that has gone up in value and then donate cash.

Do: Give the stock to the charity instead.

Call it a loophole if you like, but here’s a great tax break. If you donate stock to charity, you get a tax deduction for the amount it’s worth now.

In addition, you don’t have to pay capital gains tax on it.

Mistake #4

Don’t: Sell too many assets at a gain in one year, or any in a year that you make exceptionally good money from.

Do: Watch your tax bracket, and sell assets that have gone up in value in years with lower income.

The lower your income level, the lower your capital gains tax rate. In a low enough income bracket, your capital gains tax rate may be 0 percent.

Be careful not to sell too much at once, or you’ll bump yourself into a higher tax bracket.

Mistake #5

Don’t: Hang on to investments you no longer believe in just to avoid paying capital gains tax.

Do: Remember that sound investing trumps tax avoidance every time.

There are worse things than owing taxes. Losing money, or keeping your money in something that doesn’t go up in value, is one of them.

If you don’t believe something is a good investment, it’s usually better to sell and move on to something else, even if that means paying taxes.

How often do you check your stocks and other investments?

Join the discussion, we’d love to see you in the conversation over on Facebook, Google+ and Twitter.

Photo credit: miguel77 via photopin cc

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About Sally Herigstad

Sally Herigstad is a certified public accountant and personal finance columnist and author of Help! I Can't Pay My Bills, Surviving a Financial Crisis (St. Martin's Griffin). She writes regularly at CreditCards.com, Bankrate.com, Interest.com, RedPlum, and MSN Money. She is an experienced speaker and a member of Toastmasters International. Follow Sally on Twitter.

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