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Tax Saving Techniques

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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