How I Avoid Capital Gains Tax and How You Can, TooIf You Act Fast

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There's one week left in 2016. Many families still have time to take advantage of a major loophole regarding capital gains taxes, but many aren't aware it exists.

Over the past five years, my family has been able to realize thousands of dollars of capital gains...and we haven't paid a penny in taxes on those gains.

No, this isn't illegal. And no, it isn't because we're making moves in tax-advantaged accounts.

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Instead, it's come about by mistake -- a byproduct of my writing about taxes and investments. And while not every Fool will be able to benefit directly from this information, there are many who will, and should act quickly to take advantage of it.

Ever notice this capital gains tax quirk?

Years ago, when I was doing research on the capital gains tax, I came across the follow chart, which I've highlighted with my own comments.

Data source: IRS and author's illustrative example

That's right, if your family ends up in the 10% or 15% tax bracket, any long-term capital gains that you realize are completely tax free. I italicize "long-term" because if you don't hold your investments for at least one year, you (1) aren't investing very Foolishly, and (2) can kiss this major tax-advantage goodbye.

"Sure", you might argue, "but only the poor and those who can't invest fall in that tax bracket. This means nothing to me."

I understand that argument, but there are many more households that can benefit than you might think. Let's look at the maximum taxable income that will keep you in the 15% tax bracket.

Data source: IRS

If you live in a household that takes in $75,300, you're automatically in the top 40% of allU.S. households.

But it's about your taxable income

Here's where things start to get really interesting. Those maximum income figures are for taxable income; there's a host of deductions to be taken into consideration as well.

Let's take the average family of four with two parents and two children. If this family maxes out a health savings account and Traditional IRAs, here's what it looks like.

Data source: IRS and author's illustrative example

That's enormous! Let's put this all together. If we know the taxable limit to stay in the 15% tax bracket (for a family of four) is $75,300, but we know that our example family can realize $46,550 in deductions, that means that the family's income could be as high as $121,800 before it wouldn't be able to use this strategy.

To put that figure in perspective, a household earning that amount would be in the top 20% of all U.S. households. In other words, as many as 80% of U.S. households could benefit from this strategy -- although that figure is admittedly inflated, as many households don't have enough money left over to invest in the stock market.

How to make this work in the real world

Because you still have a week left in the year, you still have time to take advantage of this capital gains tax loophole. I suggest you take the following steps.

1. Figure out what your tax filing status will be (single, married filing jointly, etc.)
2. Add up all of your incomes, and figure out what your deductions will be.
3. If you have room left before hitting the 15% tax bracket ceiling, sell some of your long-term holdings from a regular taxable account.

Also, there's one thing that confuses many people: If you like the stock you sold, you can simply buy it back immediately after selling it. There's no wash-sale rule on capital gains , so you don't have to wait more than 30 days to repurchase it. That rule only affects capital losses. It's true that you'll pay two commissions, but the long-term tax savings make that minimal cost well worth it.

Before going off and making any wild moves, I strongly suggest consulting your tax professional. But hopefully, this article will give you an idea for how to plan your investing strategy to help your family benefit over the long run.

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