The decision to invest is a tough decision that requires one to do sufficient background research before going ahead with the investment. Often people research about the field they want to invest in. They research and understand the trends to have some level of assurance that their investment will not go down the drain. Sadly, not many people research the tax aspect of their investments. As a result, they are likely to make wrong choices or be ignorant of some tax aspects. This often results in them paying more than they should in taxes. Should you be thinking of investing, be sure to reach out to Dean Roupas, and he and his team of experts will let you know about everything that is there to know regarding tax and investments. They will give you advice that is relevant to the investment of your choice.
Here are a tax few tips that every investor should know.
- Go for tax-efficient investments.
Some investments tend to be more tax-efficient than others for various reasons. For example, if you earn an income from municipal bonds at the federal level, that income is tax-free. In some cases, that income is also exempted from taxes at state and local levels too. Tax-managed mutual funds are also a great tax-smart investment. With these funds, the managers actively work to ensure that there is tax efficiency. See your tax advisor to get a clear understanding of the tax features of various investments.
- Reinvest your dividends.
You can limit your capital gains on the sale of mutual fund shares if you reinvest dividends in the fund. This can be done automatically. Dividends reinvested boost your fund investment, effectively lowering your taxable gain (or increasing your capital loss).
Here is an example; If you originally invest $5 000 in a mutual fund, you get $1000 in dividends. Then go on to reinvest the $1000 in additional shares. Should you see your stake for $8000, your taxable gain is $2000 ($8000-$5000 your original investment and the $1000 reinvested dividends.). Often investors forget to deduct the dividends which they reinvested. As a result, they end up paying tax on an amount that is higher than required.
- Remember your retirement account.
In this day and age we are concerned and focused on making sure that we are able to sustain ourselves for the rest of their lives. One of the steps to ensure this security is by having a healthy retirement account. Contributing maximum amounts to your retirement account is beneficial in two ways. 1. Tax reduction and 2. Wealth accumulating. Traditional individual retirement accounts (IRA) are tax-free until withdrawn. When you contribute to these accounts, that also lowers your taxable income.
You can also delay capital gains taxes with a tax-deferred retirement account. A capital gains tax burden arises from the profit you generate when you sell a stock. Although holding a stock for more than a year decreases the tax rate, selling for tax reasons can be time-consuming and costly. You can postpone taxes until you make withdrawals if you trade via a regular individual retirement account, Keough, 401(k), or SEP—simplified employment pension—plan. Withdrawals made during retirement are treated as ordinary income and are taxed accordingly. This rate may be lower in retirement than it is throughout your working years.
You can further obtain a comparable tax benefit by investing in a high-growth mutual fund through your tax-deferred retirement account.
- Match your gains and your losses
Since 1913, capital gains have been taxed in the United States. Regardless of whether the tax rate changes, the requirement for investors to examine the tax’s repercussions stays constant. When you sell anything, you make a capital gain or loss. Should you hold an investment for less than a year, the short-term tax rate on profits might take up a notable portion of your profits.
You can minimise or eliminate your IRS bill by selling a nonperforming stock in the same tax year and utilizing the loss to offset the capital gains tax on your profit. Long-term losses must counterbalance long-term benefits, and short-term losses must counterbalance short-term gains. Those who repurchase a stock within 30 days before or after selling a substantially comparable investment to achieve a tax-saving loss, however, will renounce their ability to claim the loss until they finally sell the investment, pursuant to the “wash sale rule.” Offsetting is an excellent idea because you can carry over an extra $3,000 in losses to future years’ regular income.
- Do not ignore eligible tax deductions.
Make sure to seek appropriate tax deductions for your investments when filing your taxes. If you made a loss on the sale of your investment in 2020, you could deduct the loss from your capital gains. You could claim a capital loss deduction of up to $3,000 per year ($1,500 if married filing separately) if your capital losses exceed your capital profits in 2020. If you lose more, you can carry your losses forward to the next year. Fill out Schedule D and Form 8949 to claim this deduction.
You would be entitled to claim a total capital loss if you had stock in a company that became worthless in 2020 due to bankruptcy liquidation. To verify the bankruptcy to the IRS, keep paperwork such as the company’s cancelled stock certificates or evidence that the stock isn’t being exchanged anywhere.
You can deduct investment interest expenses from your net investment income if you itemize your deductions. Margin interest, which is money borrowed against the value of mutual funds or stocks, can be included in investment interest.
To reduce your chances of breaching tax requirements, get in touch with Dean Roupas and associates so that they can assist you with tax deductions that might be applicable to you.
Whatever tactics you choose, keep in mind that tax efficiency isn’t the only factor to consider when making investments. You should also consider how each investment can help you achieve your diversity, liquidity, and overall investment goals. All this while remaining within your risk tolerance. The ability to choose among your investment possibilities is then aided by tax efficiency. Before making any tax-related decisions, make sure to consult with a knowledgeable tax expert.