1. Go long term
The easiest way to reduce your annual investment taxes is to keep them for more than a year. Taxes on short-term capital gains are taxed as ordinary income. The long-term capital gains tax provides incentives for long-term investors. To take advantage of these lower rates, you must keep your investment for more than a year.
The three capital gains rates are 0%, 15% and 20%. For a single filer, you can pay 0% on long-term capital gains if your income is less than $ 40,000. While most people pay 15%, tax filers with income over $ 441,500 actually pay 20% capital gains tax on long-term gains. Joint filing creates a 0% tax for income of $ 80,000 or less. Above that, there is a 15% tax up to $ 496,600. Beyond this income, the 20% tax applies.
Regardless of the income group to which you belong, you always benefit from a tax advantage by holding investments for more than a year.
2. Take your losses
Sometimes you make a bad game. It happens to the best of us. If you have a security that has significantly underperformed, you can sell it and use this capital loss to offset your capital gains. By doing so, you can balance that with the benefits you could get from an investment that has worked extremely well.
Obviously, this is not exactly the most ideal scenario. But if you’re sitting on a dud that you know isn’t going to help you in the future, selling this position to make sure you don’t pay that much on your good investment is a strategy.
3. Use retirement accounts
Retirement accounts like IRAs and Roth IRAs offer the opportunity to invest with deferred taxes. On the IRA side, you can invest up to $ 6,000 (if you’re over 50, you can contribute $ 7,000), and the gains are tax-deferred until you start investing in them. access from the account. While you will always end up paying capital gains in the end, the IRA is a means by which to increase your investments in a way that is not held back by capital gains tax.
A Roth IRA does the same except in reverse. You pay taxes on the money you invest, but any winnings and withdrawals are not taxable. You can also use a traditional 401k for tax-deferred investments.
Again, you don’t really escape capital gains tax. What you are doing is creating a way to invest without the annual hit. This creates the ability to create more wealth over time.
Taxes are part of life. Investors are rewarded for long-term games with lower rates for long-term capital gains taxes. This, and prudent savings through retirement accounts, are the best ways to get the most out of your money.