The information in this article is up to date for tax year 2024 (returns filed in 2025).
There’s an old saying in financial circles: It’s not how much you make, it’s what you get to keep. When you make a dollar in the stock market, or virtually anywhere else, the IRS and other taxing authorities are waiting to claim their share. As you approach retirement, selling off investments to generate income may result in capital gains and the associated taxes. While this is a sound strategy for building wealth, it’s crucial to minimize your capital gains taxes wherever possible to keep more of your hard-earned money. Here are seven strategies to help you reduce your capital gains taxes as you move toward retirement.
1. Adopt a long-term holding strategy
One of the best ways to reduce capital gains taxes is by holding onto investments for the long term. Capital gains on assets held for more than a year are taxed at a lower rate than short-term capital gains. So, by holding your investments longer, you not only let your assets grow but also avoid paying the higher tax rates on short-term capital gains. This strategy can be particularly effective if you have decades before retirement, allowing your investments to compound while minimizing your tax liability.
2. Shed your losing investments to offset capital gains
Not every investment will be a winner, but the good news is you can offset your gains with the losses. This strategy, known as tax-loss harvesting, allows you to sell off investments that have decreased in value and use the losses to offset the gains you’ve made on other investments. It’s a smart way to reduce your overall tax bill. So, as you approach year-end, review your portfolio and consider selling any underperforming assets.
3. Time your big sales for low-income earning years
Timing the sale of appreciated assets is another great way to minimize capital gains taxes. If you’re retired or expect a lower income in a given year, you might choose to sell assets with significant capital gains during that time. The absence of earned income could put you in a lower tax bracket, reducing the capital gains tax you pay on the sale.
4. Take steps to reduce your taxable income
Reducing your taxable income can also help lower your capital gains taxes. Contributing to tax-advantaged accounts like IRAs or Health Savings Accounts (HSAs) can lower your overall income, which may, in turn, reduce the rate at which your capital gains are taxed. Whether you’re still working or already retired, focusing on tax-deferred contributions can be a powerful way to minimize your tax liability while still growing your retirement savings.
5. Donate appreciated assets and reap the tax benefits
Charitable giving can be an effective way to avoid capital gains taxes while also supporting causes you care about. Donating appreciated assets, such as stocks or mutual funds, allows you to avoid paying taxes on the capital gains of those assets. The charity receives the full value, and you get to take a charitable deduction. It’s a win-win for both your tax situation and your favorite charitable organizations.
6. Include stocks and mutual funds with large capital gains in your estate plan
If you’ve accumulated a substantial portfolio and expect more income than you need, you might consider including appreciated assets in your estate plan. When you pass on capital gains assets to heirs, they inherit them at a stepped-up cost basis. This means that their future gains will be calculated based on the current market value rather than the price you originally paid, significantly reducing the potential tax burden.
7. Move to a state with lower or no capital gains tax
Another strategy to minimize your capital gains taxes is relocating to a state with lower or no taxes on capital gains. Many states tax unearned income, including capital gains, so moving to a state like Florida or Texas, where there is no state income tax, could allow you to save significantly on your investment earnings. While this isn’t a simple decision for everyone, it can be a game-changer if you’re looking to reduce your overall tax burden.
Keep more of what you earn
Building a portfolio that can fund your retirement takes years of disciplined saving and smart investing. But when it comes time to sell off those assets, minimizing your capital gains taxes is just as important as growing your wealth. By following these strategies, you can keep more of your investment gains and enjoy the fruits of your labor without giving up too much to the taxman.
Need help reducing your tax liability this year? File your taxes online with ezTaxReturn to make the process fast and easy. Take advantage of available deductions and credits to maximize your refund and keep more of your money.
The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.
