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What Is Capital Gains Tax — And Can You Avoid It?
So, you’re ready to invest like an adult and start making some real money moves, but there are a few terms that you still don’t fully get. Don’t worry, you’re not the only one. A big scary phrase that you may hear a lot is “capital gains tax.” So, what is it, how does it apply to you, and what are some ways you can avoid paying it? Let’s find out together…
So, what is capital gains tax?
In its simplest terms, a capital gains tax occurs when you sell an asset for more than you paid for it. If you buy a house for $400,000 and then sell it for $500,000 (way to go!), the capital gains tax is applied to the $100,000 difference. To answer the question of when you actually pay the capital gains tax, we have to understand realized vs. unrealized gains.
Realized gains are when you actually make the sale of the house. The moment the asset is sold, the gains are officially “realized” and therefore taxable.
Unrealized gains are unsold investments. So, that stock you own that has grown consistently over the past five years has made “gains,” but because you haven’t sold it yet, those gains are still unrealized and not yet included in a capital gains tax. When you do sell that stock for a profit, then the capital gains tax applies.
What assets qualify for capital gains tax?
Capital assets are assets that have a useful life of longer than a year and are not involved in the regular operation of a business. For example, stocks, bonds, jewelry, homes, vehicles, and collectibles are the most common assets hit with the capital gains tax.
How much do I have to pay in capital gains tax?
The rate at which the capital gains tax is applied to you depends on your tax bracket. You can find a breakdown of which tax brackets pay which rate here, but depending on your filing status, your federal capital gains tax will either be 0%, 15%, or 20%. Now, there’s also state capital gains tax that you’ll have to consider on top of that.
Who does the capital gains tax affect the most?
While we may want to imagine that the capital gains tax only applies to the super-rich, the truth is that it can affect almost anyone. Like we noted above, anyone who has capital assets is open to the capital gains tax. People living in big cities, people accumulating large assets, and people with discretionary income are typically the most likely to have to pay capital gains tax. But if you’re looking to sell off profitable stocks or sell your home or vehicle, the capital gains tax is something to think about.
How can life insurance help me avoid paying capital gains tax?
So, what does all this have to do with life insurance? Well, with permanent life insurance, you can grow your funds in a tax-free environment. If you want a buy and hold option (instead of trying to actively buy and trade stocks), and if you are interested in having a pot of money for emergencies or to pass to a family is good, a life insurance policy can serve as a tax-free investment account. Permanent life insurance is one of many ways to build up tax-free savings.
A life insurance policy isn’t limited to avoiding the capital gains tax either. It can also help you reduce your income tax. Investing in a permanent life insurance policy means you can protect your loved ones when you pass while still benefiting from tax-free growth while you’re still alive.
When you think of life insurance like this, you can begin to look at your permanent life insurance policy as an investment account. Think of the death benefit as a fee you pay instead of paying a capital gains tax. You can either pay for the cost of insurance (which comes with a death benefit), or you can pay taxes.
Permanent life insurance might not be as sexy of an investment as cryptocurrency, and it’s not as familiar to many as an IRA, but it can safeguard your future and protect you from things like the capital gains tax.
Permanent life insurance is one of the investment types you should give plenty of thought to when you're thinking about minimizing what you have to pay in taxes. Giving a death benefit to your loved ones and growing your wealth tax-free is an incredible combination.
If you fall into the category of people who will likely be affected by the capital gains tax (or if you just want to avoid the risk and do everything you can to avoid capital gains tax), then permanent life insurance may be a great fit. Reach out to Amplify to ask any and all questions you have, and get a quote today.