Tax Tips For Stock Market Investors


Investors can finally enjoy Spring now that Tax Season is over. For many investors, the time between January, when the tax forms start arriving, and the moment when the tax filing envelope has been sealed, is rather distressing.  By making intelligent decisions in investing, reporting, and record keeping, investors may mitigate a huge tax bill.

First thing’s first: Accurately record stock dividends.

Investors can end up paying excess capital gains tax on their mutual fund sales because  dividends reinvested automatically were not accurately recorded.  Capital losses are increased by reinvesting dividends which increases the investment in a fund and the result is a reduction in capital gain.  To put it into perspective, $3,000 invested in a mutual fund with $1,000 reinvested in additional stock shares over the years might sell for $5,000.  The taxable gain would appear to be $2,000, but, the actual gain would be $1,000 once the reinvested dividends are subtracted.  It is not uncommon for investors to forget to deduct their reinvested dividends thereby overpaying capital gains tax.

This $1,000 taxable income savings may not seem significant, but, over the years the compounded growth potential those savings could have produced is compelling.  Investors should strive to keep accurate reinvested dividend records and review the tax rules at every tax season to be aware of new tax avoidance opportunities in order to escape overpaying investment taxes.

Bonds may offer “safe” investments.

Investors may turn to bonds as safe haven investments when the stock market is performing poorly or turbulently.  Bonds often perform opposite to equities, which could yield interest income which may not all be taxed.  If bonds were purchased in between interest payments (usually semi-annually), the interest accrued prior to purchase usually will not be taxed.  The entire amount of interest must be reported, but, the accrued interest is subtracted on another tax form line.

Short term government debt is another safe harbor for investors.  Offering potentially significant tax advantages, municipal bonds (munis) are often issued with tax exempt status by local municipalities or state governments to meet operating expenses or to finance the construction of schools, hospitals, or other municipal projects.

Write-offs can yield overlooked tax savings.

Many operating expenses may be written off if an investor is self-employed and the same is true if one invests in small businessSelf-employed individuals can write off the cost of meals and lodging while traveling for business as a business expense.  They may also be able to deduct their home office space and vehicle in addition to many other self employed tax benefits.

It can be possible write off a portion of the purchase of a personal computer used to manage one’s investment portfolio.  One must calculate the amount of time the computer is used to oversee investments to determine what portion of the computer’s cost is deductible.  For example, a $1,000 computer used 20% of the time monitoring one’s stock portfolio would have a write off of $200.

Cost basis is a critical consideration for home sellers when reporting the capital gain on the sale of their home.  To figure the adjusted cost base of the home, the amount invested in renovations or improvements with a useful life of more than a year can be included in the cost of the home which could reduce the capital gain realized from the sale.

Maximize contributions to tax deferred programs.

Individual retirement accounts (IRAs) and simplified employment pensions (SEPs) are two well-known tax deferred accounts, in addition to many others.  Investments in tax deferred accounts are not taxed at the time of investment, but, are taxed at the time of withdrawal.  In all likelihood, one’s tax bracket will be lower in retirement than it is during their current working and active investing years.

Losses can offset profits in a reporting year.

Within the same year, capital gains can be lowered by capital losses and short term gains can be lessened with short term losses.  In addition, up to $3,000 of capital loss can be carried over future years.  Capital gains and losses only effect one’s tax return when they are realized.  Paper gains and losses do not matter when filing; it is only when the stocks are sold are they counted as income gains or losses.

Commissions and fees are part of the cost of buying stocks.

Discount brokerages usually charge lower fees, but, these fees still add up and could make a difference of hundreds, perhaps thousands, of dollars which could be saved by active traders.  When working with brokerages, the commissions and transfer fees should be added to the amount paid for stocks and deducted from the sale of shares.  These transfer fees and brokerage costs are expenses associated with the cost of managing the investor’s portfolio and impact taxable income.

Save money by holding stocks.

Short term capital gains (profit on stocks held for less than one year) are taxed at a higher rate than long term gains, making the buy and hold strategy more attractive.  When considering the long term impact of compounding on decreased income taxes acquired today, more than a 13% difference in tax rate (dependent on country or state) between long term and short term capital gains can make it very enticing to hold onto stocks for a minimum of a year or more.

Most investors plan to participate in equity markets for 10, 20, 30 years or more, shuffling their stocks over the course of their capital accumulation period.  Investors who fit this description by could save far more than they realize by using a long term buy and hold strategy.

Smart tax management equals more savings.

The number of tax laws can seem overwhelming, but, knowing them can work to an investor’s advantage.  Proactive tax management should be an important part of a prosperous financial plan.  Investors should take care to utilize every tax advantage applicable to them to avoid missing out on expenses or other income lowering means.  Savvy investors should spend the same effort to lower their taxes as they put in to researching the best stocks to buy.  An investor’s annual return could get a sizable monetary boost by lowering their taxable earnings.


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