By Dan Miller, WCI Contributor

Nobody likes paying taxes, and one strategy for reaching a high net worth is (legally) minimizing the amount of tax that you pay. One area that is of special interest to those with a high income and/or net worth is minimizing taxes paid on capital gains and dividends. That is because many such investors get a larger percentage of their overall net worth from these types of investments. In this article, we will look through five strategies for minimizing the taxes that you pay on capital gains and dividends.


What Is Capital Gains Tax?

Capital gains tax is a tax on certain investments—generally, a tax on the appreciation of an asset when you sell it. The amount of tax you pay on these capital gains varies depending on your income as well as how long you've held the asset. Current federal tax law taxes short-term (held for less than one year) capital gains at the same rates as ordinary income. But if you've held the asset for at least one year, you pay capital gains tax at a lower rate, from 0% to 20%.


5 Ways to Pay No Taxes on Capital Gains and Dividends

Here's a look at five ways to reduce (or even eliminate) your investment taxes:


Keep Taxable Income Low (and Be Married)

Because the long-term capital gains tax rates depend on your taxable income in the year in which you receive them, one way to reduce or eliminate your capital gains tax is to keep your taxable income low. Additionally, the thresholds for paying no capital gains are higher if you're married. For the 2023 tax year, a married couple filing jointly can have a taxable income up to $89,250 and pay a 0% tax rate on long-term capital gains and qualified dividends.

More information here:

How Tax Brackets Work for 2024


Harvest Your Capital Gains (and Losses)

Another way to reduce your capital gains tax bill is by making smart use of tax-loss harvesting. With tax-loss harvesting, you sell a particular investment at a loss when the market is down and then immediately buy a similar investment. When done right, the sale of your investment triggers a taxable loss, allowing you to use that to offset capital gains from other investments. 

There are certain rules about how to tax-loss harvest (including the Substantially Identical Rule and the Wash Sale Rule), so make sure that you understand the process and/or work with a qualified professional before you attempt it.


Donate to Charity

You may prefer to hold on to your assets, but if you have a qualified charity that you want to support, one way that you can do that in a tax-advantageous way is by donating investments that have appreciated to a charity. Rather than selling your shares and donating the cash to the charity of your choice, donate the actual investments in kind.

When you donate investments to a charity, neither you nor the charity will pay capital gains on the appreciation in most cases. Depending on the investment and the charity, the charity may not want or be capable of handling certain types of investment, so make sure you do your research first. Another option that can go along with this strategy is the use of a Donor Advised Fund (DAF).


Buy Equities with Low or No Dividend

Many equities give off dividends as part of the overall performance of the stock. These dividends are typically taxed as capital gains. However, not all equities give dividends—instead some stocks don’t return much to investors beyond growth in the intrinsic value of the stock. Warren Buffett's Berkshire Hathaway (BRK) stock is one such stock famous for not paying dividends and instead focusing all the return on the price of each share of stock itself.

So, one option for reducing or eliminating capital gains tax on dividends would be to primarily invest in stocks that don't pay out dividends. However, you want to be careful to make sure that you aren't choosing lower-performing investments just because they don't give off dividends. 

avoiding capital gains taxes

More information here:

Why Getting a Dividend Should Not Be Exciting



The final method on our list may, shall we say, come with other negative consequences. But if you die, the cost basis of inherited equities passed onto future generations is typically reset. This would allow your heirs to sell the assets tax-free. The savings here can be immense. One other thing to note is that generally only half of the property passed onto a spouse receives a step up in basis at death.


The Bottom Line

Capital gains tax is a tax on the appreciation of assets sold within a tax year. Currently, capital gains that are sold within one year are subject to a tax rate that is the same as the ordinary income tax rate, while long-term capital gains are taxed at a lower rate. However, there are ways to reduce or even eliminate tax on capital gains and dividends. Following some of these simple steps will help you lower your overall tax bill and keep more of your hard-earned cash in your pocket.


If you need help with tax preparation or you’re looking for tips on the best tax strategies, hire a WCI-vetted professional to help you figure it out.


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