Investing is a great way to grow your wealth, but it can also be an expensive endeavor. The government taxes investments heavily, and if you are not careful, you could end up paying more in tax than the actual worth of your investment! This post has compiled this list of foolproof ways to reduce the tax burden on your investment profits. Find out how to invest with peace of mind and save money at the same time.
Keep your portfolio in tax shelters accounts
Most taxpayers are not aware that they can shelter their portfolios in tax shelters accounts. These include but are not limited to Roth IRAs, traditional IRA, 401ks, and profit-sharing plan accounts. If you have a spouse participating in any of these plans, then it may be possible for both spouses to use the combined annual contribution limit on these accounts.
The Roth IRA offers a unique tax shelter for investors because contributions are 100% tax-deductible on the front end, and qualified distributions (e.g., those after age 59 ½) are not subject to income taxes or early withdrawal penalties. However, it is crucial to note that you must be either retired from your job or at least 59 ½ to contribute.
Traditional IRAs offer a tax shelter for investments in the same way. But, contributions are not deductible on the front end, and distributions may be subject to income taxes and early withdrawal penalties of up to 10% if you’re under 59½.
If your 401k has a profit-sharing provision, it may allow for up to 25% of the company’s profits as matching contributions that will also be tax-deductible.
The bottom line: your investment portfolio should always be in a shelter account if you’re looking to reduce taxes on those investments. Hiring a CPA accountant or firm can help you make the necessary tax calculations and make the best decision for your assets.
Have long-term capital gains
Many successful investors make the most out of long-term investments in stocks and bonds. This is because you can pay a lower tax rate on the profits from these types of investments when held for more than one year.
However, this relief only applies to assets bought at market price, not those purchased with other people’s money or those that have appreciated. To take advantage of this treatment, the investor must wait at least one year before selling their investment for a profit. This is long-term investing because it includes assets held over periods longer than 12 months.
Consider real estate investment
Investing in real estate has many advantages. One of the most important benefits is that it can generate significant tax deductions for your overall income taxes and thus provide substantial savings on what you owe to Uncle Sam. The IRS allows a deduction from capital gains (25%) for passive activities like a rental property. This means that if you have some rental income and deductions related to the property, then you can deduct up to 25% of your taxable income.
Investing is not just a way to make money; it’s also an opportunity for you to control your tax burden and, in turn, have more of the money that you earn. The strategies mentioned above are for helping investors find a way that works for them and their financial goals. However, before you can make any decisions, it’s essential to know your long-term goals.
(Disclaimer: This content is a partnered post. This material is provided as news and general information. It should not be construed as an endorsement of any investment service. The opinions expressed are the personal views and experience of the author, and no recommendation is made.)