Tax Strategies for Investors

(Shutterstock)

There are investing strategies that culminate in success. You want to make more money. That’s the point of investing. But how do you keep it?

It’s not too early to start thinking about tax season 2024. A tax strategy is now vital to maintaining the wealth your investments have generated. There are numerous types of investments and various ways to protect your profit.

Keep Records of Reinvested Dividends

You can limit capital gains on the sale of mutual fund shares. To do this, you must automatically reinvest dividends in the fund.

By reinvesting dividends, you increase the investment in the fund and reduce your taxable gain. If needed, it can also increase your capital loss.

For example, let’s start with an initial investment in a mutual fund of $4,500. Over the years, rather than take any dividends out, reinvest those gains in purchasing additional shares. Down the road, the decision is made to sell your stake in the fund. At the time of sale, the total investment would be made up of $4,500 as the initial investment, plus $1,500 in dividends for a total sale value of $6,000.

The mistake many people make is paying tax on the total of $6,000. Because they reinvested the gain in the purchase of additional shares, the actual tax liability is only on the $1,500 of the reinvested dividends.

This may not seem like a lot of money, but by not taking advantage of this rule you’ll lose a lot in the long run. That’s because of the compounded growth those extra dollars wouldn’t have earned.

If you don’t consider reinvesting dividends every year, your tax-adjusted returns suffer.

But it’s imperative to keep accurate records of these reinvested dividends. That way, you can reduce any taxable gains. Meet with your financial advisor and review tax rules that apply to your situation.

Use the HSA to Its Fullest

Don’t forget a health savings account (HSA). It’s a convenient and effective form of tax reduction. However, it’s only available for those with a high-deductible healthcare plan.

With the HSA, you have a tax advantage, times three. The contributions are all tax free; earnings are tax-deferred; and withdrawals for qualified medical expenses are tax free.

The limit for contribution for self-only is $4,150, and for a family it is $8,300.

Losses and Profits Should Be Matched

It’s usually a good idea to match the sale of a profitable investment with the sale of a losing one. That way the capital losses can be used against capital gains. You can also deduct short-term losses from short-term gains.

Remember, if things haven’t gone well that year, you can carry up to $3,000 of your losses over to future years.

High-Income Investors Should Hold Stock

A short-term capital gain is defined as less than one year. It is taxed at ordinary income, which can be higher than the capital gain rate that applies to long-term gains.

An ordinary tax rate can be as high as 37 percent. Meanwhile, the long-term capital gains tax maxes out at 20 percent.

Investing is a long-term endeavor for more reasons than one.

Avoid Wash Sales

Whether it be any stock sales or your home, you’ll want to claim losses on your return. But be aware of the wash-sale rule.

Wash sales happen when an asset is sold at a loss and then re-purchased within 30 days of the sale.

For example, suppose you sold your stock for a loss and bought it back 15 days later. That initial loss cannot be claimed on your tax return.

If you try to claim a wash sale, the IRS will refigure the total on your return and hand you a bill. That might trigger them to look deeper at your return.

But this loss isn’t gone forever. If you refrain from repurchasing it in the next 30 days, you can buy it on day 31 and claim your initial loss on your return.

K-1 Forms Often Overlooked

A K-1 form is issued if you’ve invested in a publicly traded partnership or a partnership. The K-1 form details your tax situation. This includes any payouts you’ve received from the firm.

It can be overlooked. It sometimes isn’t sent until after the tax-filing date. Then, you'll have to file an amendment if you’ve already filed a return.

Don’t Wait to Start Selling Losing Investments for 2024

Many investors wait until the last possible moment in December to sell their losing investments. Selling at a loss is one of the best ways to reduce taxable income.

If you need this deduction, start evaluating it before the end of 2024. Avoid the last-minute panic of unloading losers.

Plan for Your Wins and Losses

You want to avoid paying as much in taxes as legally possible. By incorporating some tax strategies, you could diminish your tax liability. Consult a financial professional to explore which strategies will work for your situation.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.