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5 Tips for Reducing Your Taxes on Investments

Every year that dreaded time comes around when we have to pay our taxes, whether we like it or not. Much like the holidays, tax time is palpable in the air. One hundred years ago, for ordinary Americans, paying your taxes was a much simpler affair with minimal IRS tax forms. However, over the years, with the rise in the population and as our society became more complex, our taxes became more complicated too. There are numerous forms to fill out that all have their separate functions for a number of different tax class specifications. There are also many questions, like how are my returns on my investments taxed and how much do I stand to lose? Many tax analysts and financial advisors will tell their clients that when you make investments in the stock market you always want to do so with the potential tax in mind, on top of all the fees. When taken into account for taxes, a winning investment can actually turn into a loss. Here are 5 tips for reducing your taxes on investments.

  1. Liquidate your losing investments. While you are selling some of your winning investments, you should also consider selling some of the losing ones to balance out your capital gains tax. You can always buy those investments back within thirty days if you don’t want to be prohibited from claiming a capital gains loss due to the wash-sale rule.
  2. You can invest into a fund that has many taxes advantages, which are implemented to encourage you to invest. Many of these mutual funds have tax-deferred or better yet, tax fee investment policies.
  3. Also, many analysts recommend that you reformulate your portfolio for maximum tax efficiency. One of the best ways to do this is by moving your high tax investments into non-taxable or deferred tax accounts. This is also a great way to diversify your investments to maximize your gains.
  4. You can also convert your customary IRA into a Roth IRA. By putting your investment capital into a Roth IRA you are able to make tax-free withdrawals for life. This is especially great if you have a sizable IRA with years of capital invested and interest accrued.
  5. Another great way to reduce paying taxes on your investment is to not purchase mutual funds right before the year-end dividends. Many investors might see this an opportune time to invest, but it is better to wait until after the payouts so that you are not left paying heavy taxes on a new investment.

In the end, many financial specialists and advisors will tell investors who want to reduce their capital gains taxes to plan ahead. Being fiscally responsible ahead of time, making the necessary precautions and being tax efficient, are ways to save big when Uncle Sam comes knocking. Moreover, it is important for investors to remember that that while they can strike it rich in the stock market, they can lose out big time when tax time comes around. In most cases, a smart investor is a prosperous investor.

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