One of the worst things about scoring big on an investment is the associated tax you get slapped with as a result. It sucks. There you were, playing it smart in your dorm room, working tirelessly to spot a good investment, only for Uncle Sam or whoever to snatch a portion of it through capital gains tax, federal income tax, alternative minimum tax, state taxes and maybe even local taxes. It’s a lot.
Don’t get us wrong, we know paying taxes is great and the services they pay for are essential, but it doesn’t take away the bitter taste, especially knowing your expenditure would boost the economy in a far more superior way to the taxes you pay.
So how cool would it be if you could potentially lower your tax liability through tax-efficient investment strategies? Mmmm hmmmm. That’s what we thought. So, without further ado, here are some ways you can possibly lower your tax liability.
Find Tax-Deferred Accounts
If you’re not sure what we mean by tax-deferred accounts, we’re talking about things like employer-sponsored accounts such as 401k and 403b plans, as well as individual retirement accounts and annuities etc. Whether or not your contributions will be tax deductible or made on a pretax basis will depend on the individual contribution, which is why you should have a chinwag with a tax advisor. Either way, tax savings can be made.
Look For Tax-Efficient Investments
There are plenty of investment accounts out there that are managed in ways that are designed to help you reduce your taxable contributions. It is all about the way they are managed by the investment managers who can reduce the portfolio turnover, swap the investments over to stocks that don’t pay dividends and even sell stocks at a loss to sort of act as a counterbalance to your taxable gains in the other parts of your portfolio.
Know Where Tax-Savings Can Be Made
Knowing which strategies and investments are going to suit you best is half the battle, which is why we spoke to CMC Markets and asked for their advice on how to reduce and defer taxes, in which options like spread betting, ROTH-IRA accounts, ISAs, charitable giving, employer-sponsored plans are all great routes to explore as they are all set-up with this motivating factor in mind.
Manage Your Taxes Better
The decisions you make about when to buy and sell investments, and about the specific investments you choose, can help to determine your tax burden. We’re not saying they should sway your investment strategy, but they can be carried forward. Things like managing your tax losses, loss carryforwards, capital gains, fund distributions, tax-exempt securities, and ETF selection should all be considered in your ongoing portfolio management processes.
Basically, investing tax-efficiently doesn’t have to be complicated but, as you can see, it needs some planning to work well. But nail it, and start understanding how to be more aware of your taxes, you have the potential to improve your returns big time.
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