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"How can I reduce my investment related taxes?"

If you haven’t filed your taxes yet you need to soon. And for many Americans, it’s the day they see their tax bill for their investments during the year. Between long term capital gains, short term capital gains, interest income, and dividends, investors can easily rack up thousands of dollars in taxes.

But there are ways to reduce your tax bill. This week we are going to go through strategies we use to help lower clients’ tax bill from their investments.

“How can I reduce my investment related taxes?”


An important first step is knowing how different investments are taxed. Stocks and bonds may be taxed very differently and that could cost you a lot of money in the long run.

Income from interest, whether it be from corporate bonds, bond mutual funds or ETFs, a high yield savings account or money market fund, or a CD (certificate of deposit) from a bank are all taxed at your ordinary income rate.

 

That means, if you are in a married household with income of $170,000 for example, the interest on your savings is taxed at 24%. Nearly a quarter of your earnings go to the government.

Stocks on the other hand can have a much lower tax rate. You are rewarded by the government for investing for longer time periods. In general Qualified dividends, which are dividends from stocks you have owned for more than 60 days, are taxed at a much lower rate, 0% or 15% for most Americans.

And if you sell that stock for a gain after holding it for more than a year, that gain is taxed at that lower tax rate as well.

This should make you look at your current asset allocation. You might have a tax deferred account like a 401k, a Roth IRA, and a taxable brokerage account. What types of investments should go in each account?

As a very general rule, you want fixed income such as bonds in a 401k or traditional IRA type of account and stocks in a Roth IRA preferably, or a taxable brokerage account if you don’t trade very often.

However, if you are an active investor or invest in very actively managed mutual fund, it may be in your interest to switch that entirely!

So its important to know what you are invested in, how it is taxed, and what savings options you have available.

Matt Hylland