Tax Saving Techniques
Provided by FinancialContent.com
By Chris Stallman
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Tax season
is around the corner and people across the country are busy getting
their taxes ready by the April 15th deadline. If you invested during
1999, chances are that you probably had to pay taxes on your investments.
Although the next tax season is a year away, you might want to start
considering some ways that you can save on your taxes.
Taxes
can test one's nerves at times but it helps if you plan out
ways you can save on your taxes ahead of time. By doing this, your
money that you have saved will be used more effectively. There are
a few strategies that you can use that can save you a considerably
large amount of money during your investing tenure.
Take a Long-term Approach
One of the best
ways to save on your tax bill is to take a long-term approach to
investing. By holding your stocks for at least a year, you qualify
for the reduced capital gains tax, thus saving you quite a bit of
money.
When it
comes to taxes, the long-term investor really does beat out the
short-term investor. The short-term investor is constantly trying
to beat the market and making more trades and therefore paying a
higher tax rate than the long-term investor who is holding onto
their investments. Even if the long-term investor earns a slightly
lower rate of return, the tax breaks usually more than make up for
it.
Offset Your Gains with Your
Losses
The IRS has
enacted a law that allows investors to save on their capital gains
tax bill by allowing them to offset their gains with their losses.
This basically means that you can sell a stock for a loss and then
subtract that loss from what you gained on your other investments
to reduce the total capital gains. For example, Bob earned $2850
from selling 2 stocks one year but one of his stocks lost him $400.
If he sold that stock in the same year, he would only have to pay
taxes on $2450 (2850-400=2450) of capital gains.
This technique can really save you a lot of money on
your taxes. However, a lot of people think that it means they can
sell the stock and buy it right back. You should be aware that there
is a one-month waiting period before you can buy back the stock.
But if you do have a stock that has not performed well and you wish
to sell it, you can use the loss to save a little money on your
taxes.
Avoid High Turnover Rate Funds
Although the
other two strategies also pertain to mutual fund investors, this
one is exclusively for them. The amount of the portfolio that is
replaced each year is its turnover rate. Mutual funds pool money
from a group of investors to manage a large portfolio of stocks
and bonds. During the time that they are invested, the mutual fund
might occasionally replace stocks with new ones. Although the investor
never sold their shares of the mutual fund, they would have to pay
taxes because the mutual fund passed on the capital gains that they
made from selling stocks to the investors.
One way you can avoid large tax bills on your mutual
fund is to look for mutual funds with lower turnover rates. Because
the mutual fund buys and sells stocks less often, they pass on fewer
capital gains to you so that means you pay less in taxes. Index
funds generally have extremely low turnover rates and there are
currently some other mutual funds that use this tax-saving strategy.
You can find out the turnover rate of a mutual fund on such sites
as Investor.com
Taxes can limit what you save for college, a house,
or retirement but if you take advantage of some tax-saving techniques,
you can save a lot of money and increase your total return.
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