Capital Gains Should Be Long-Term
The idea is to compute your cost basis and determine whether you are long-term or short-term on any business or investment you have.
It is better if you are long-term as the tax is less than short-term.
Keep Your Portfolio in Tax Sheltered Accounts
Do your clients have a taxable brokerage account at Fidelity or Schwab? Maybe you are also the owner of such accounts. In your younger years, you may not have paid much attention to your investments because they seemed to be growing no matter how you held onto them. But let’s face it – time marches on. As you have gotten older and paid more attention to your portfolio, the tax consequences have become apparent to you.
When you are over the initial stages of portfolio growth (the accumulation phase), you should start asking yourself how much tax you are paying (or maybe you have asked yourself that question already). Once you have answered that question, you can start understanding ways to reduce your taxes.
One of the most important ways to reduce the taxes that you pay is to shelter your taxable assets in tax-deferred accounts such as 401(k)s and IRAs. When you are young, it is important to save for retirement, but it can also be important to pay less in taxes. By keeping your taxable assets in tax-deferred accounts, you defer the tax liability on those investments (convert them from ordinary income) until you retire and start taking withdrawals. By deferring the tax liability on pre-retirement profits, you can shield yourself from paying higher taxes.
Invest in Municipal Bonds
You may have heard about them before, but what are municipal bonds? How municipal bonds can help lower your tax liability on investment income? If you have, this article will give you a better look into these tax-free instruments.
What are Municipal Bonds?
Municipal bonds are debt instruments issued by state and local governments. These bonds are used to pay for public expenditure and infrastructure projects. A municipal bond works like a loan. The government issuing the bonds promises to pay you the amount you invested on the said bonds over a period of time. Depending on the agreement with the issuer, this period of time can be anything between 30 days and 30 years.
These debt instruments are usually tax-free. However, to make sure the bond issuers secure enough funds, the interest rates on municipal bonds can be high.
As with other types of bonds, you can trade municipal bonds in the secondary market. However, in order to purchase municipal bonds, you must be an accredited investor. An accredited investor is a financial expert who can understand the risks involved in investing in municipal bonds.
How Can Municipal Bonds Help You?
Municipal bonds can provide returns on your investments. These returns are not taxable. Currently, the federal government has rules on tax-free municipal bonds.
Consider Real Estate Investments
We buy real estate that will appreciate in the future. We look for a home with potential of appreciation. A home located in a great school district, a home located on the beach, or in a growing city or town, or one located next to a university that has a great reputation. These are all important factors when deciding on a real estate investment.
The most important factor in Real Estate Investments are the location of the property. Location, Location, Location.
You can buy an investment property and then remodel it, sometimes with only costs of the cosmetic items to make it look good, but if it’s located in the wrong place, no matter what you do, it will not appreciate.
We can also buy and develop land, then build a house on it. If we build the home on a vacant lot located in a great area, we can sell the house to a person who wants to live in a great area, but does not have enough money for the down payment, so they can take out a mortgage loan, and we can get the down payment back over time. This allows us to get a larger check every month and grow our real estate investment.
See how a Real Estate investment can help you pay less in taxes.
Try Index Funds
An Index Fund is a type of mutual fund that invests in a broad range of stocks that are in a specific market. Index Funds are great for investors that don’t want to do a lot of work learn more about investing. They are also great for investing in large amounts of stocks.
The index fund will simply mimic the stocks in that market, thus you don’t have to worry about choosing specific stocks yourself. The fund manager doesn’t have to worry about your whims, and will earn a consistent, if not spectacular, return.
There is a downside, however. The company which administers the Index Fund charges a management fee. That fee can be quite hefty, so if you do choose to invest in Index Funds, keep your money in the fund for a long period of time.
We all know that we owe taxes within every quarter but how much we owe to the government and the final tax deductions of our income determine which investment strategy will be the best in the end.
Knowing the rules governing the best investment won’t be enough on its own. It is just the tip of the iceberg. You have to go deeper in deciding what investment will work for you.
Achieving greater tax savings is very important and thus, you should hold on to investments where you can save more. It is a smart investment decision on your part if you can avoid paying taxes on your investment return. Investment strategies can never change the tax laws. You can enjoy greater savings the more you are aware of the tax rules and use the right investment strategies to your advantage.
To help you out, here is a list of the best investment strategies for multiple taxpayers. The good thing about using these strategies is the fact that you are going to save more in multiple ways than just merely cutting down the total amount of tax.
- Real Estate Investment
- Life Insurance
- Stock Market
- Online Business
- Start a Home-based Business
- Saving Accounts
- Invoice Discounting
- Prepaid Expenses