It’s that time of year again when traders have to tally up how much of last year’s gains get kicked up to Uncle Sam on tax day. Maybe you missed the boat on this year’s filing, but here are five tax tips for investors to keep in mind for next year.
It may be scary to give up access to your hard-earned money until you’re 55 years old, especially for younger investors, but the more of your annual income you can contribute, the more tax savings you’ll enjoy.
Contributions into 401(k) accounts occur prior to taxation, meaning that contributors can not only potentially pay a lower tax rate on that income upon withdrawal, the investment can also be put to work generating returns prior to taxation. And it’s not like the money is completely locked away. In the case of an emergency, early withdrawals are simply subject to a harsh 10%-plus early withdrawal fee.
It’s certainly not advisable to be holding onto bad investments or grossly over-priced assets simply for the sake of paying lower taxes on the sale, but if you are simply rebalancing your portfolio or upgrading from one stock to another, be mindful of any stocks you may have owned for nearly one year.
Profits from the sale of stocks within a year of purchase are taxed at the ordinary rate of 35%, whereas proceeds from sale of stocks held for more than one year can be taxed at a rate as low as 15%.
Again, the end of a calendar year shouldn’t be the primary reason for buying or selling stocks, but if your investment strategy involves some flexibility, selling certain stocks at the end of the year could help reduce your tax bill.
If you’ve been looking for a good time to dump a losing investment, locking in those losses before the end of the year allows you to reduce your capital gains for that year by the amount of the loss. In addition, up to $3,000 of capital gains losses can be subtracted from ordinary income each year.
If you have young children or are anticipating having to foot a college tuition bill someday, a 529 plan allows you to put your savings to work completely tax-free.
Although contributions to a 529 plan are not deductible, the income that the plan draws will never be subjected to federal tax if it is used for college expenses.
The $10-20 fee that your broker charges each time you make a trade may seem like a negligible amount when it comes to your year-end tax bill, but those charges add up quickly, especially for day traders.
Remember to subtract the trading fee from the cost basis of every stock you buy and the gains of every stock you sell. These fees can add up to thousands of dollars per year, and subtracting them from gains can have a meaningful impact on your taxes.
As always, the best tax tip for any investor is to discuss your individual financial situation with a tax professional.
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