Minimizing Your Taxes In A Taxable Investment Account

I get a lot of questions about how to legally reduce your taxes. Here are some common Rules Of Thumb that can be applied to save all of us money at tax time.

1 – Long-Term Capital Gains

Short-Term Capital Gains are defined as an investment held for less than a year that’s subject to regular income tax rates. Long-Term Gains are instruments held greater than a year that have the lower Cap Gains Tax Rates of zero, 15%, or 20% depending on your Adjusted Gross Income.

2 – Buy-And-Hold Strategy

In all my years of doing tax returns, I’ve never seen a day trader who consistently made money in the markets. Buy-And-Hold Strategies lend themselves toward reaping the rewards of Long Term Cap Gains Rates.

3 – Choosing Passive Funds

Passive Funds like Index Funds are more tax efficient than actively traded mutual funds. They can be a lot easier on your wallet in April.

4 – Qualified Dividends

Ordinary Dividends are taxed at regular income tax rates, while Qualified Dividends are taxed at the lower Capital Gains Rates. This requires a longer term strategy because the financial instrument must be held for a period of time before it will qualify as a “Qualified Dividend.”

5 – Tax Efficient Bonds

Municipal Bonds are not subject to Federal Income Taxes. Series I Bonds and Treasury Bonds aren’t subject to state and local taxes. Before choosing any of these, make sure to do some math. These bonds generally have a lower yield. It can be better overall, to just pay the additional tax on a higher yield instrument.

6 – Tax Loss Harvesting

Harvesting losses at either the Short or Long Term Phase of holding investments can help reduce your income tax load. This should be reviewed before the end of any tax year.

Let me leave you with this.

I’m going to say something that no one would ever expect a “Tax Guy” to say. It’s the fact that sometimes it’s better to pay the tax.

Let’s explain this by using an example.

If your overall income tax rate is 25% between Federal and State taxes then don’t let the income tax implications stop you from making money. I’d rather make a dollar, pay a quarter in taxes, and be able to save .75 cents, then not make the dollar in the first place.

I’ve seen sophisticated investors make this mistake time and time again. If you’re holding a stock that’s made you significant amounts of money in the past but is no longer performing, then it might be time to sell the position, pay the tax, and put that money into something that will work for you in the future.

No one likes paying taxes less than me, but sometimes it’s a necessary evil. Just because we want to retire well, doesn’t mean that we should ever allow our money to rest.

If anything, the opposite is true. Don’t let the tax implications stop you from making an honest buck.

We’re all going to get through this. Let’s get through it together.

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