Keep More of What is Yours—Ideas for Paying Less in Taxes
In this edition of the Elevate Planning Commentary, I’m going to share some ideas that can help with a topic near and dear to many people’s hearts…giving less money to your least favorite uncle while avoiding a stay at the Crossbar Hotel. This commentary will discuss federal taxation only as states have varying rules. We’ll look at ways of optimizing capital gains, utilizing qualified plans and qualified charitable distributions (QCDs), and finally smart uses of Roth conversions.
Before we jump in, let’s first address the difference between tax preparation and tax planning. Tax preparation is backward-looking and typically occurs annually in the first four months of the year. It involves compiling and reporting financial data from the past year to file accurate tax returns. Tax planning is forward looking with the purpose of making strategic decisions such as optimizing the timing of income and expenses, maximizing deductions, credits, and qualified retirement plan contributions, choosing the best business structures, and taking advantage of changes in tax laws to proactively reduce your tax liability.
Many people simply assume the person who prepares their tax return also does tax planning, but that is very frequently an incorrect assumption. My experience says maybe two or three out of ten who prepare taxes also do tax planning. I strongly encourage you to ask your tax preparer a direct question: Will you visit with me periodically throughout the year to discuss things I can do to reduce my tax liability? Then you will know for sure.
Capital Gains
Ok, let’s talk about capital gains. First, you need to know that short term capital gains (assets held for one year or less) are taxed as ordinary income while long term capital gains (assets held for more than one year) are taxed based on your taxable income (including the gains themselves). Qualified dividends are also taxed this way. To be considered “qualified”, dividends must be issued by a US corporation or a foreign corporation based in a country with a US tax treaty AND you must hold the stock at least 61 days during the 121 day period surrounding what is called the ex-dividend date (which is the first day a stock trades without the right to receive the next declared dividend).
Here are the brackets for 2026:
Your total taxable income determines the capital gains rate. As is usually true, higher earners pay higher rates. Income levels "stack" gains on top of ordinary income, potentially pushing you into a higher capital gains bracket. I'll discuss some ideas below to mitigate this effect.
Here’s how it works:
Low-Income Threshold (0% Rate): If your taxable income falls entirely within the 0% bracket, long-term gains are tax-free. For example, a single filer with $40,000 in ordinary income and $5,000 in long-term gains has total taxable income of $45,000—still in the 0% capital gains bracket, so no tax on the gains. This is ideal for retirees or those in lower brackets harvesting gains strategically.
Middle-Income Threshold (15% Rate): Most taxpayers fall here. If your income exceeds the 0% threshold but stays below the 20% level, gains are taxed at 15%. For instance, a married couple filing jointly with $350,000 total taxable income (including $60,000 gains) pays 15% on those gains ($9,000 tax), while $290,000 is taxed at ordinary income rates.
High-Income Threshold (20% Rate): For high earners, gains above this level are taxed at 20%. A single filer with $600,000 taxable income (including $100,000 gains) pays 20% on the gains ($20,000 tax). Additionally, if modified adjusted gross income (MAGI) exceeds $200,000 (single) or $250,000 (joint), tack on an additional 3.8% Net Investment Income Tax (NIIT) to your capital gain rate.
Here are some ideas to help you reduce or eliminate capital gains taxes:
The first, and most obvious one is to hold assets long enough (366 days or more) to qualify for long-term capital gains rates. This is ideal for high-net-worth individuals with real estate or stocks, where timing sales around the one-year mark can significantly cut taxes.
Realize gains in low income years. Strategically sell appreciated assets during years of lower taxable income to qualify for the 0% or 15% long-term capital gains rate. For retirees, this could mean before Social Security or required minimum distributions (RMDs) begin, or in years with significant deductions, filling up lower brackets without pushing into higher ones.
Donating highly appreciated, low basis assets like shares of stock directly to a charity enables you to avoid paying capital gains tax on the appreciation while receiving a charitable deduction equal to the asset’s fair market value. The charity can then sell the shares for full market value and pay no tax. Be sure to check the rules on charitable contributions as there are sometimes limitations on deductible amounts.
Similarly, gifting appreciated assets to lower income family members can reduce taxes paid, potentially to zero. This works because capital gains tax is based on the recipient’s tax bracket. Gifting shifts future appreciation and tax liability to someone taxed at a lower rate. Large gifts may require filing a gift tax return and kiddie tax rules apply to gifts to minors.
Take advantage of tax loss harvesting. This is the practice of selling underperforming investments to realize losses that offset capital gains dollar-for-dollar, plus up to $3,000 of ordinary income annually. Any excess losses can carry forward indefinitely. This is particularly effective in volatile markets or after strong gains on certain stocks. Be sure to wait at least 31 days to avoid the wash-sale rule if you care to repurchase the shares.
Maximize use of the Primary Residence Exclusion. In case you are not already aware, there is a $250,000 exclusion on gain for single filers and $500,000 exclusion for joint filers. You must have lived in the home as your primary residence for at least two of the last five years before sale. In many cases this exclusion can completely eliminate capital gains taxes on home sales.
Use installment sales to spread out the recognition of capital gains. An installment sale spreads capital gains over several years as payments are received rather than recognizing the full gain in the year of sale. You pay capital gains tax proportionately with each payment received. This can keep annual income lower, potentially qualifying you for lower capital gains tax rates. Installment sales can be useful when selling businesses, real estate, or other large assets.
Utilizing Qualified Plans to Reduce Current Taxes
I’m referring here to pre-tax contributions, not Roth which are made post-tax and won’t reduce taxes today. There are two basic categories of qualified retirement plans: Defined Contribution Plans and Defined Benefit Plans. Unsurprisingly, Defined Contribution Plans define the maximum contributions that can be made to various plans. Limits are different for IRAs than for Simple IRAs than for 401ks. People 50 years of age or older on December 31st get an additional “catch up” contribution, creating an even larger deduction.
Defined Benefit Plans, aka Defined Benefit Pension Plans, are different in that they define the benefit the plan participant will receive and then use formulas to determine the contribution required to generate that benefit. This is the type of retirement plan your grandfather may have had. In certain circumstances, for self employed business owners, utilizing this type of retirement plan can save hundreds of thousands of dollars in current taxes. Yes, you read that right. Hundreds of thousands.
The key to using pre-tax qualified retirement plans is maxing out contributions to them. The more you put in, the lower your taxable income and the lower your tax liability. If you aren’t contributing the maximum amount to your plan, you are volunteering to prematurely enrich your least favorite uncle.
A qualified charitable distribution, or QCD, is a special type of charitable gift that lets individuals age 70½ or older transfer money directly from an IRA to a qualified charity without counting it as taxable income. This is even better than making a charitable gift and deducting it because a QCD provides a tax-free income exclusion, not a deduction. That means it reduces adjustable gross income (which may lower your Medicare premiums and reduce IRMAA amounts (click here for more about Medicare and IRMAA) and provides benefit even if you don’t itemize deductions. Importantly, QCDs can satisfy part or all of your Required Minimum Distribution (RMD) if you are old enough to be subject to them. This makes them very popular with retirees having enough other income to meet all their living expenses. Be aware QCDs have a $100,000 per person per year limitation. Amounts above $100,000 don’t receive QCD treatment.
Let’s wrap up by changing gears and having a brief look at smart uses of Roth conversions.
Roth Conversions
Roth IRAs, in contrast to traditional IRAs, are funded with dollars you have already paid taxes on. That part isn’t fun, but the tax deferred growth and tax-free distributions they provide are wonderful! As you might imagine, smart use of Roth IRAs can hedge against future tax rate increases and lower income taxes, particularly in retirement.
Roth conversions involve shifting funds from traditional IRAs or 401(k)s to Roth IRAs, paying taxes upfront for future tax-free growth and withdrawals. Ideal times to use a Roth conversion are in low income years (job changes, business losses, large deductions due to medical expenses) and in the first few years of retirement. This works because when taxable income is lower, tax rates are lower.
In the first few years of retirement, before social security, pensions, or RMDs begin (and taxable income goes up), you may find yourself in a temporarily low tax bracket. Converting pre-tax IRA or 401k money to a Roth IRA in these years means good things happen. Specifically, you may pay tax at lower rates than you will later, all future withdrawals from the Roth are tax free, and your Roth IRA is exempt from RMDs. RMDs increase taxable income which can push you into higher tax brackets, increase tax on Social Security benefits, and raise Medicare IRMAA premiums, so lower RMDs are better. Of course, there is always the prospect of Congress raising tax rates which would make more money in a Roth IRA even more desirable. Finally, in the event your last check doesn’t bounce and you leave money in a Roth IRA to your kids or grandkids (provided your Roth IRA has been open for at least five years prior to death), they won’t have to pay income taxes when money is withdrawn.
I pray you or someone you care about will find this commentary useful. Thank you for taking time to read it.
Ken Armstrong, CFP®, RICP®, ChFC®, CLU®, CASL®, CLTC
CEO & Senior Wealth Management Advisor
Elevate Capital Advisors
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