Tax Day is still a few months away, but many investors are already looking for easy ways to slash their tax bill heading into the new year. Let’s take a look at a few quick and easy strategies for investors to cut taxes next year.
Use Leftover Losses from Previous Years
With the Dow Jones at an all-time high under President Trump, many investors are finding their portfolios stronger than ever. Nevertheless, if you have any investment losses from 2016 or earlier that you haven’t used to offset income on previous tax returns, you can subtract those losses from profits that you make this year. That means a smaller 2018 tax bill.
What’s more, if your losses from 2016 exceed those from 2017, you can subtract up to $3,000 from your ordinary income.
To put it simply, you can easily slash your tax bill by capitalizing on any investment losses from previous years. That’s one of the simplest ways to save money this tax season.
Utilize Your Tax-Advantaged Accounts
Many investment options offer built-in tax advantages. Whether you have a 401(k), HSA, or IRA, tax-advantaged accounts offer you the chance to save some serious cash on your tax bill.
The big advantage of these accounts is that you won’t rack up tax liabilities when you earn dividends from stocks or profits from bonds. In addition, you won’t have to pay capital gains taxes after you profit from selling shares. Why penalize someone for making a smart investment move?
If you haven’t already, look into tax-advantaged accounts to learn more about drastically cutting down your tax bill in 2018.
See if You’re Eligible for a 0% Tax Rate on Capital Gains
Since 2008, there has been a 0% tax rate on long-term capital gains for individuals falling within the 15% marginal tax rate or below. In 2017, that means married couples with taxable income up to $75,900 or single people with taxable income up to $37,950. If you fall within this group, you have a real chance to save money on Tax Day.
This opportunity works best for people falling into one of three categories: if you’re temporarily unemployed; if your income varies from year to year; or if you’re between 55 and 70 years of age. If this sounds like you, look into the 0% tax rate on long-term capital gains.
If you hold stocks or mutual funds in a non-retirement account and some have unrealized long-term gains, you can exchange those investments for something similar, turning them into realized gains. For someone with a $60,000 taxable income, that means you can earn $15,900 in realized investment gains—and pay a 0% tax!
Match Your Investment Accounts Wisely
One great way for investors to cut taxes is to put their investments into accounts that qualify for tax breaks. Unfortunately, many investors still make the mistake of placing their investments into accounts that actually have the opposite effect.
Municipal bonds, for instance, are well known for their potentially-huge tax benefits. While this is certainly the case, the tax break disappears when those bonds are placed into an IRA account. Bond interest earned from an IRA is tax free anyways, so you can save money by placing your municipal bonds elsewhere.
There are a number of opportunities for investors to cut taxes by matching their investments with the right accounts. Many accounts offer the chance to save thousands of dollars on taxes. Make sure to do your homework first, however, and avoid putting investments into accounts that offer no real benefits.