It’s every one’s “favorite time” of the year again.
As one of life’s two certainties, taxes can be well… the most taxing. But if you’re aware of what you can and cannot do with your money, the better you are.
Here are three key tips to keep in mind as an investor to help save a few dollars.
Tip No. 1 – Use Tax Friendly Investments
Once you’ve figured out what you owe, think about how you can save.
By setting up a retirement plan, you can deduct your contributions to IRAs, and 401(k) plans for instance, which can help increase your tax-deferred gains. Of course, there are contribution limits you must be aware of prior to doing this.
It’s best to check with an accountant.
Tip No. 2 – Understand Capital Gains Taxes
Profits from investing in stock can be taxed with capital gains taxes and dividend income tax.
A capital gain tax happens when you sell a stock for profit. This is found by identifying the difference between your cost basis — or the original value of the stock – and your sales price. For example, if you bought a stock at $2 and it ran to $10, the capital gain tax applies to the $8 profit just made.
If the difference between cost basis and sales price is negative, there now exists a capital loss, which can be used to offset capital gain.
There are two types of capital gains taxes, including the long-term capital gains and the short-term capital gains. To determine your eligibility for either, it’s important to know if you’re a trader – holding for less than a year – or an investor – holding for at least a full year.
According to Nerd Wallet:
Short-term capital gains tax is a tax on profits from the sale of an asset held for one year or less. Short-term capital gains tax rates equal your ordinary income tax rate — your tax bracket.
Long-term capital gains tax is a tax on profits from the sale of an asset held for more than a year. Long-term capital gains tax rates are 0%, 15% or 20% depending on your taxable income and filing status. They are generally lower than short-term capital gains tax rates.
Tip No. 3 – Use Investment Losses to Offset Gains
Even the best investors have a few losers in their portfolio. Fortunately, the IRS lets you use your capital losses to offset your other investment income, and lower your tax bill.
As always, it’s best to check with an accountant, though.
Unless you enjoy dealing with your friendly government officials, and their “generous” tax penalties and fines, pay up. Be smart with taxes. If you’re not well informed, hire a well-versed accountant.