Three Tax Tips for Individual Investors
There are many simple tax principles which can help investors in their quest to save money. As an investor, preparing your taxes for the next year can present a lot of confusing and unanswered questions. Using these simple tax tips can help your investments meet their full potential.
Invest in Municipal Bonds
Investing in municipal bonds can offer significant advantages given their tax-exempt status. The returns they generate do not need to be claimed as income when the taxpayer files their return. This low-risk investment is especially attractive when stock market expectations are low.
Write-Offs and Deductibles
Writing off a portion of your taxes as expenses can be beneficial to investors, particularly investors who are self-employed. If you use your phone to invest or for business purposes, you may be eligible to write off a percentage of your monthly phone bill as an expense. Look into what expenses you’re purchasing for your business and think of ways you can use them for your advantage.
Holding Stocks
The buy and hold strategy offers advantages over short-term capital gains. Stocks sold under the year mark are always taxed at a higher rate than those which have been sitting for over 12 months. However, it’s important to realize that this method may not work for stocks which are losing value.
Conclusion
Being an individual investor can be a challenging process when you are not aware of certain tax principles. Be sure to do research on what tax advantages are available for individual investors. Preparing yourself now will help you to avoid income loss in the future.
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What Investors Need to Know About ETFs and Taxes
ETFs have become popular with investors because of their low cost and efficiency. They’re easy to trade, but most investors are unaware of the benefits which ETFs bring, especially when compared against similar investments.
What are ETFs?
Exchange-traded funds (ETFs) are investments traded within the stock market just like traditional stocks. The value of an ETF exists similarly as a stock, bond, or other financial commodity and is traded close to its net value. Most ETFs track an index and allow trading of shares just as you would a stock portfolio.
Tax Efficiency
ETFs have authorized participants who assemble appropriate values and send them to designated banks which then place them into a trust. The exchange-traded funds share value with the authorized participant in the same sense as a mutual fund.
What is a Mutual Fund?
Mutual funds are group-wide investments which allow you to pool money together with other investors in order to purchase stocks, bonds, or other financial products which are difficult to purchase individually. Unlike ETFs, shares in a mutual fund are priced once a day after the market closes and do not fluctuate throughout the day.
Beware of Non-Efficient ETFs
Bond ETFs are tax inefficient investments which often require work to rebalance your investment. Bond ETFs require the investor to pay on any capital gains received.
Conclusion
ETFs are fast, easy, and tax-efficient commodities which are becoming highly popular with investors. Compared to similar ways of investing capital, ETFs are a higher quality investment choice.
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How Dividends on IRAs Are Taxed
Traditional IRAs, dividends and capital gains from IRAs are all tax-free. Roth IRAs are funded with after-tax capital. These contributions are not tax deductible and are important to know when considering how your dividends on IRAs are taxed.
What is an IRA?
An Individual Retirement Account (IRA) is a savings bank account created to aid with retirement. There are two types of IRA accounts: Roth and Traditional. A Roth IRA allows for a zero deduction rate for your contributions; however, following its rules can lead you to a tax and penalty free retirement. Traditional IRAs allow for deductions with deposits and can help delay taxes on invested funds until withdrawn.
Roth IRA Withdrawal
For a normal bank environment, dividends and other capital gains benefit from taxes. As long as money is withdrawn from the five-year-old account after the retirement age of 59½, you can avoid any extra taxation. If money is removed before the retirement age, you’ll owe a 10% penalty on any gains withdrawn.
Traditional IRA Withdrawal
Traditional IRAs are taxed at one’s current bracket rate. Any capital gains from your IRA do not benefit from lower tax treatments; they are taxed the same rate as your income. The only exception is when contributing to a traditional IRA using capital which has already been taxed.
Conclusion
When removing dividends from your IRA, it’s important to know what type of IRA you are removing your money from. Following careful guidelines and being prepared is the only way to ensure that you’re getting the best use of your money.
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The Basics of Reporting Foreign Bank Accounts on Your Taxes
Americans with foreign bank accounts were once able to rely on secrecy with the IRS. Foreign bank secrecy was a longstanding tradition in many cultures, including the United States. Rampant offshore banking has significantly worn down this tradition and failure to report a foreign account is now considered criminal activity.
What Happened To Offshore Banking?
The IRS has sued the Swiss Global financial services company (UBS) claiming that they encourage American investors to hide income within unreported offshore accounts. After settling criminal charges, the UBS handed over around 52,000 undeclared foreign American accounts. The IRS is also beginning to target other common offshore bank sites.
What’s the Problem?
Not reporting the existence of a foreign account on your Report of Foreign Bank and Financial Account Form (FBAR) can result in serious fines and penalties. The biggest issue with the IRS is that taxes on foreign income earned with the foreign bank are not being paid. This can carry significant civil and criminal consequences leading to fines, penalties, and even jail time.
What Should I Do?
The best preemptive option is a “Voluntary Disclosure.” The IRS Voluntary Disclosure Program proposes a reduced penalty and promises no criminal prosecution. This is better than a “Quiet Disclosure” which involves amending past taxes, but still leads to criminal charges due to unpaid penalties.
Final Word
Failing to amend a rule-breaking foreign account puts you at serious risk and may subject you to severe penalties in the event of discovery. The IRS will only continue to crack down harder on foreign accounts in the future.
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How to Pick the Right Investment to Offset a Capital Loss
It’s important to know how to offset your losses with the right investments. You need to carefully consider which investments are best to sell for taxes purposes. In this brief article, we will cover what your best options are in order to turn your loss into a gain.
Selling the Right Investments
The rule of thumb in investment games for taxes is to sell off investments which do not meet your investment goals. You should never sell an investment simply because the price has dropped. Consider the criteria of a sound investment value.
What Makes a Sound Value?
Market conditions are always in fluctuation. As a result, when an investment drops in price you need to evaluate what the market conditions are and how they are going to affect the value of your investment over the course of time. Investments which are negatively impacted over the long term when market conditions change are best to sell, while other investments, whose long term value are still viable despite market fluctuations, are best to keep in your portfolio.
Harvesting Your Tax Loss
By selling the investments that have lost value, you can significantly reduce your tax burden on the capital gains you win from your investments. Determining this is as simple as looking at depreciated investments which no longer possess positive prospects for growth.
When it comes to picking the right investment to offset a capital loss, know your investment strategy. Never sell an investment if possesses potential value in your portfolio.
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Should You Pay Your Taxes with Your Credit Card?
While you should have the necessary funds in a traditional bank account to pay your tax liabilities, this is not always an option. You cannot use a debit card to pay your taxes, but credit cards are accepted. The drawback of using a credit card is that you have to pay back the credit card company plus interest; this ultimately results in a higher cost.
Personal Credit Card Interest Not Tax Deductible
Interest accrued on personal credit cards for tax payment purposes is not tax deductible. The only credit card interest that is tax deductible is when the expense is for a business purpose, and this must be documented. Obtain a statement from your credit card company for tax purposes to determine the actual amount of business expense interest that was paid.
Small Tax Debt
Now, if you only owe a small amount of taxes, using a credit card is okay. However, at the same time, you should only use the credit card if you will be able to pay the balance off in-full at statement time, or before the bill even comes.
Use Only Zero Interest Accounts
Only pay your taxes with a credit card if it is a zero interest account. Otherwise, you end up paying more than you owed to begin with. This doesn’t make much sense, but for some individuals, it is the only option.
Closing Thoughts
Only use your credit card to pay your taxes if you have no other choice. If you end up having to make payments to the IRS and a credit card, you’re really getting hit with a double whammy. You end up paying one and half times (minimally) your original debt owed.
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3 Reasons Not to Lower Your Taxes
It may seem like backwards reasoning to not lower your tax liability, but it really is for the best in terms of having more money available for retirement and capital investment. There is a right time and place to lower your taxes. This should also be done carefully and in the right sectors of your financial portfolio. But there are scenarios in which lowering your general tax liability is not the best option. Below we will highlight reasons for why lowering your liability may not be preferable.
Roth IRA and 401K
When you work with Roth IRAs and 401K retirement savings plans, you have more money available at retirement. The younger you begin your Roth accounts, the more funds you will have available. It can also reduce your tax liability in retirement, and that is when you need those funds the most.
Deliberately Offset Capital Losses
Depending on your financial situation, intentionally offsetting a capital loss with a gain may be the right idea. A capital gain is defined as profiting from the purchase of stocks, investments or other appreciating assets. A capital loss is the opposite. Canceling out a loss may be the right option.
Gift Assets
Consider gifting substantial assets to children. The future income derived from those assets is taxed at a lower rate upon selling the asset. Unearned income tax applies to earnings over $2100. Gifted assets are taxed at the “kiddie tax” and “child tax” rates rather than the rates which apply to traditional capital gains, profit and income.
Closing Thoughts
What it boils down to is that lowering your tax liability may turn around to cause trouble later. Keep your tax liabilities where they are and do not lower your income, shift assets or make harsh decisions until you have spoken with your financial advisor to ensure that it is the right move.
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How to Reduce Your Capital Gains Taxes
Capital gains are distinct from income. This is income earned from the sale of assets, stocks or investments. If your primary income is from capital gains, making several payments to the IRS a year may be a good idea. In other words, it may be beneficial to follow similar practices as those who are self-employed year round.
Do Not Sell for 1 Year
Hold your investments for at least one year. Once an investment hits the one-year mark, it is seen as a long-term investment. This reduces the tax percentage you would pay, thus reducing the overall tax burden.
Sell During Financial Difficulty
Your overall income plays a role in the amount of long-term capital gains tax that you pay. Those in the 35-percent and below brackets pay 15-percent capital gains tax. Higher tax brackets pay 20-percent. Selling when you are low on income or experiencing a major financial loss like retirement, will allow you to lessen the amount of tax owed.
Leave Investments to Family
Never sell your investments and leave them to a family member in your will. If the family member sells the investment, taxes will not be due on the previous years’ gains reports or the gains from the date you purchased the investment.
There are over one dozen ways to avoid paying capital gains taxes altogether. It requires meticulous record keeping, moving a lot and making the right financial decisions. The assistance of a financial advisor can help you keep your capital gains taxes to a minimum.
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Using Your Tax Refund for Short and Long Term Goals
Most Americans look forward to receiving their tax refunds. It helps families get caught up on bills, make improvements on their home or set money aside for savings. It is a good idea to get a sense of what goals you’d like to achieve with your refund before it arrives.
Emergency Fund
Having an emergency fund is important. It is ideal to have enough in your emergency fund to support your household entirely for a period of 3 to 5 months. In the event of a major family tragedy, job loss or major illness, these funds will come in handy.
This is seen as a long-term goal because it takes time to build this fund and have a sufficient amount available.
Vehicle and Home Purchase
When you are planning to purchase a vehicle or a home, having a larger down payment is a good idea. Not only does it reduce the balance owed, but your payments each month will be lower. Saving your entire refund for several years may allow you to purchase a brand new vehicle for cash and have zero payment.
Business Capital
A long-term goal may be to start a new business. To do so, you need capital (money to invest). It may take 5 years of receiving tax refunds to have enough to start your business with the assistance of loans. Open a separate account for refund monies to be deposited into for this purpose.
As you assess your short and long-term goals, you can appropriate funds from your tax refunds accordingly. If you are desperate for a vacation, your tax refund can be used in a short-term perspective to achieve your goal of a vacation. Rather than spending your funds quickly, consider setting goals and using the funds for those purposes instead.
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