US tax system
The US tax system is three-tier. Taxation applies at the federal, state and local levels. Taxes are levied on income, wages, sales, property, dividends, imports and others, as well as various fees.
In the United States, there is a high degree of decentralization of government, so federal and state taxes are completely separate from each other. Each level has its own authority to levy taxes. The federal government has no right to interfere with the state tax system. Each state has its own tax system, which is different from the tax systems of other states. There may be several jurisdictions within a state that also levy taxes. For example, counties or cities can levy their own taxes in addition to government taxes. The US tax system is quite complex.
In the United States, the principle of parallelism operates, so one income can be taxed both at the federal level, and at the state or local level. Naturally, state taxes are substantially lower than the federal tax rate.
Capital gains taxes
Federal capital gains tax rates can be 0%, 15%, 20% for assets held less than 12 months. The application of a specific rate depends on the method of filing a tax return based on the marital status of the individual filing the tax return: “not married / not married”, “married / married, joint declaration”, “married / married, separate declaration”, “head of household”. So, for example, for the declaration, which is filled out by individuals with a family status “not married / not married” and income from capital gains up to 38,600 dollars per year, a tax rate of 0% is applied, income from 38,600 to 425,800 dollars per year – 15 %, income over 425,800 dollars per year – 20%, respectively. Capital gains on assets held for more than 1 year are taxed at the top federal tax rate of 20%.
At the corporate level, the standard income tax rate is 21%.
How to avoid capital gains tax?
There are several ways that are available in order to skip the tax. But keep in mind that all of them are not beneficial for the country`s economy.
Let`s have a look at some of them.
- Match losses. Investors can realize losses to compensate and void profits for a specific year.
- Exclusion at the primary place of residence. Individuals can exclude capital gains up to $ 250,000 from the sale of their primary residence (or $ 500,000 for a married couple).
- Share the stocks with your family members. In case you faced with high capital gains rate, then you may share your stocks that are highly appreciated with your family members. With those members that are lower in brackets. The recipients of the gift assume that you are calculating your incremental value, but use your own tax rate.
- Change your state with lower tax bracket. Another way to avoid is to move to a lower tax bracket state. As you may know state taxes are added to federal capital gains tax rates. And these tax rates in turn varying depending on your location. For example, California has the highest US capital gains rate. Internationally California`s rate is the second, up to 37.1%.
- Giving your stock as a gift to charity. Instead of donating money to charities you support, you can donate securities. You receive the same tax deduction. When a charity sells shares, they are not subject to capital gains tax. The cash you would give is the same amount you would get to sell the stock without paying the capital gains yourself.
- Wait until you die. Most people die with a highly valued investment. When you die, your heirs receive a value increase and therefore do not pay capital gains tax for the entire growth period.
- Stock Exchange. Investors in stocks with highly valued securities can also make a similar exchange. Some services offer investors one highly valued security the opportunity to exchange it for an equal but more diversified portfolio. This costly service can help investors avoid paying even higher capital gains taxes.