Posted by Trent Accounting

Tax Planning Strategies for Individual Investors

Tax Planning Strategies for Individual Investors

Tax planning is an art of learning to manage financial affairs to defer or avoid taxes.  It is used by businesses in helping to reduce tax liabilities and all available deduction, exclusions, allowances, and exemptions work together in the most efficient tax manner. But tax minimization is a major goal but a short-sighted one. It must also focus on increasing sales, improving quality products or producing goods and services efficiently. Every taxpayer must strive toward optimizing taxes rather than minimizing them. Knowing the law to safeguard and enforce rights and claims of every person, specifically in the aspect of investment. 


Tax planning is one of the most important factors in decision making. Good decision makers generally seek to manage taxes in every transaction. Knowing the fundamentals of taxation and how to apply them allows for better decision making and more effective in financial planning, through recognition and identification of tax issues. It is not only earnings that must be reduced by taxes paid, but earnings must also be reduced by any expected future income taxes generated by such earnings. It is the government's duty to provide protection to individual investors to ensure that the market is fair and fraudulent activities are eliminated. Individual investor studies personal investments and gets a real-time update of the stock market. Trading through the internet is the most popular. They are individuals who managed their own money and purchases relatively small lots of securities for a personal account.

Taxes are driven by forms of securities investment rather than economic substance and investors can utilize planning techniques to accomplish different results including acceleration of losses, acceleration of income and postponement of gain recognition. Here are some techniques:


  • Generation of long-term capital gains and deferral of income. Individual investors are taxed more favorably on long-term capital gains than on short-term. Capital will generally be taxed as adjusted net capital gains if the property sold is held for more than 18 months, it will be taxed at a minimum rate of 28%, so-called buy-and-hold or low to moderate portfolio-turnover strategies.  The differential rate should encourage more individual investors to implement strategies that would produce capital gains taxed at 20% or 28%. Aside from rate differential, the deferral feature is another benefit of generating long-term gains.


  • “Wash Sale” and “straddle rule” investors should follow. Wash Sale Rule occurs when you trade or sell securities at a loss. Within 30 days before or after the sale, it will disallow a loss deduction when you recover your market position. If you buy a substantially similar stock or security are acquired or an option to acquire is entered into. Straddle Rule happens when a pair of transactions is created then offsetting the positions. Further, it is a rule that prevents undue deferral of tax on income or short-term capital gain into long-term capital gain by disallowing the premature deduction of a loss on sale or disposition of one leg of a straddle position while retaining the other, offsetting leg or position.


  • Use more tax-favored identification system. It would be more advantageous from a tax perspective for an investor to identify the specific tax lots disposed of, which would help to maximize after-tax performance. Tax-efficient strategies may include identification of lots that produce less taxable gains or more taxable losses and/or more long-term capital gains and short-term capital losses. 


  • Hedge Fund option arrangements. A hedge fund is an alternative investment from pooled funds that employ numerous different strategies to earn an active return, for their investors. Hedge fund interest would constitute a capital asset to investors. The investor can achieve a deferral of taxes and possible recognition of long-term capital gain through the use of a "reverse conversion" – at the money long call and short put at identical strike prices and expiration terms with a term of more than 18 months. 


Investors entering into such a transaction must, however, enter into the transaction with a sufficient pre-tax economic motive. Moreover, there must be a reasonable expectation that a pre-tax economic profit can be achieved after taking into account all the transaction cost involved.

Tax structures may change from time to time, constant updating is a key for taxpayers to take advantage of tax provisions that will benefit as well as heeding to comply legal obligations. A disciplined and structured investment plan is the most effective strategy to more worthy and successful investment.






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