Managing Your Investments to Trim Your Tax Liabilities
If you don’t have a strategic tax plan, building wealth through investing can be like running into the wind. Your running partner is now the taxman, and he’s taking his cut of every dime you earn. Paying out part of your earnings to the IRS is a fact of life-but that’s no reason to pay more than you have to.
Make Money, Owe Taxes
Uncle Sam taxes you on interest, dividends and capital gains. The tax rates on these types of earnings change periodically based on who’s in charge at the White House. The current guidelines for taxpayers in the 15 percent tax bracket or higher are:
* Capital gains earned on securities held for longer than one year are taxed at 15 percent.
* Capital gains earned on securities held for less than one year are taxed as regular income.
* Capital losses can be used to offset capital gains in the same year, but not if you sell a position at a loss and repurchase the same position within the next 30 days.
* Dividends are taxed at 15 percent. This rule is set to expire in 2010; if it is not renewed, dividends will then be taxed as regular income starting in 2011.
Trimming Your Tax Liability
The most effective way to cut your tax liability is to stop making money. But that’s just not practical. Instead, see if you can use these strategies to control your tax bill:
* Pick mutual funds with a low turnover percentage. High turnover means the fund is doing a lot of trading, and trading creates taxable gains.
* When you take profits, review your portfolio to see if you can sell a losing position to offset your capital gain.
* Estimate your taxes in December and take necessary actions before the tax year ends.
* Maximize your IRA contributions.
* You can deduct investment-related expenses if they exceed 2 percent of your adjusted gross income; keep records and take your deductions!
* Emphasize growth stocks over dividend-paying stocks.
* Follow a buy-and-hold strategy.
There’s no glory in overpaying your taxes. Make wealth-building easier on yourself by having a tax plan and sticking to it.
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