If you’re considering jumping into investing (or have already started), you need to know the tactics to avoid paying massive amounts of taxes on them. We’ve compiled a list of tax tips for investors. Check them out.
Hold investments for longer than a year
Whenever you make money off your investments (aka capital gains) you are taxed on that income. However, the length of time you held the investment dictates the rate you’ll be taxed at.
These taxes, called capital gains taxes, change at the year mark. If you hold your investments for a year or less, you’ll be taxed at the short term capital gains rate, which is the same rate as income tax.
But if you hold your investments for a year and a day, you’ll get taxed at a more manageable long-term capital gains rate.
This rate can get as high as 20% for big earners, but it’s more likely you’ll pay somewhere between 0 and 15%.
Buy Municipal Bonds
Buying bonds means you get to collect interest on those bonds, which is a great source of passive income if you buy enough.
But unless you buy municipal bonds, the IRS is entitled to a share of that interest. When you buy either city, state, or county bonds, you are exempt from paying federal income tax on those bonds. If you buy municipal bonds in your home state, you’ll be exempt from state and local taxes as well.
One thing to note is that if you sell your municipal bonds for a profit, you’ll have to pay taxes on the gain.
Sell Losing Investments
If you’re losing money on a particular investment, you might want to consider selling it off. Investment losses offset capital gains, so if you make $2,000 and lose the same amount, you won’t have to pay on the amount you’ve lost.
In addition, if your investment losses exceed your gains, you can use them to offset up to $3,000 in taxable income.
Put Your Money in Tax Sheltered Accounts
Putting your investment money into tax-sheltered accounts is a great way to defer paying taxes on various investments.
Accounts like 401(k)s, 403(b)s, and certain IRA plans aren’t tax-free, but you won’t have to worry about paying taxes until you start making withdrawals. By the time you do that (barring some emergency), you’ll likely be in a lower tax bracket anyway.
Have more questions about investments and taxes? Shoot us an email or give us a call.