Posted by Jim McClaflin, EA, NTPI Fellow

Basic Investment Tips & Tax Implications

Basic Investment Tips & Tax Implications

Some years, Congress changed the rules facing investors. In other years, the economy has the final say in rethinking the best investment plans. At the same time, the personal situation of investors changes, from the arrival of children to the loss of jobs.

Investors are facing a changing environment. Hence, the need to maximize their dollar investment. Taxpayers who wish to create wealth can overcome the tax hazards of this volatile environment by following a few historically useful steps.


Configure your retirement account to work

The number one issue for investors is retirement. People seem to take more seriously about having enough to support themselves for the rest of their lives. Maximizing contributions to a pension savings plan makes sense for lowering taxes and increasing wealth. Traditional and 401(k) IRA contributions increase tax-free until withdrawn, with the added benefit of reducing taxable income as you contribute.

A deferred retirement account also allows you to defer capital gains tax. The profit you make from the sale of stock results in a capital gains tax liability. Holding stocks for more than a year lowers the tax rate, but trading based on the tax implications can be time-consuming and expensive.

When trading through a traditional personal retirement account, Keough, 401(k), or SEP (Simplified Employment Pension), you can avoid taxes until withdrawals are made. Any withdrawals made during retirement are taxed as normal income. This rate may be lower in retirement than the employment tax rate.

Channeling an investment in a high-growth mutual fund through your deferred retirement account offers a similar tax benefit.


Review your portfolio mix

Different types of investments have different tax implications. You can reduce your exposure to taxes and risk by allocating tax-free assets to your portfolio. Non-taxable municipal or munis provide interest income that is not taxed by the IRS and, depending on the issuer's location, can also save the state and local communities' taxes.

When considering bond purchases, be aware of the investment return defeating pitfalls, such as rising interest rates. Another option is a tax-managed mutual fund, whose aim is to reduce investors' tax debt by avoiding frequent transactions and balancing holdings with ammunition.


Play the match game

The United States has taxed capital gains since 1913. Although the tax rate is subject to change, the need for investors to consider the consequences of this tax remains constant. The gain or loss takes effect when you sell. If you have an investment of less than a year, the short-term tax rate on your income can healthily reduce your income.

You can reduce or cancel the IRS bill by selling insolvent stocks in the same fiscal year and using the loss to offset capital gains tax levied on your profit. Long-term losses should be matched with long-term gains and short-term gains with short-term losses. However, under the "Wash Sales Rule," persons who redeem a share 30 days before or after the sale of a substantially similar investment to realize a tax loss will lose their ability to claim the loss until they ultimately sell the investment.

Offsetting is a good idea. You can accumulate an additional $3,000 in regular income losses in the years to come.


Maximize itemized deductions

For years prior to 2018, expenses incurred to make investments may be itemized deductions that provide tax reduction benefits. These different deductions must amount to more than 2% of adjusted gross income before they can count.

Examples include courses related to investments made, subscriptions to financial publications, special software, and investment fees. Legal and accounting fees for investment advice, as well as travel costs incurred to obtain such advice, may be deducted.

You can deduct the cost of a computer and home office used to manage your investment based on the percentage of time strictly spent on the investment.

From fiscal years after 2017, these investment-related expenses are no longer deductible as an itemized deduction.


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Jim McClaflin, EA, NTPI Fellow
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