Investment Strategies to Lower Your Tax Burden

Every year I file my tax returns early. But this year one of my stock broker’s delayed issuing a 1099 DIV statement. I had to wait this long. Hopefully this coming weekend I’ll be all done with this year’s taxes. In case you are not aware, you have to file your taxes by April 15^th unless you want to apply for extension.

Every year I file my return alone. I don’t go to a tax consultant. But I strongly suggest you should consult with a certified and registered tax consultant, if you feel the slightest of unease. While you go to a tax preparer to file your taxes, there are certain steps that you can take yourself to lower your tax burden for the coming years.

If you’re an E*TRADE customer, check out the company’s Tax Center, which provides an array of tools and resources for customers, all in one place. This includes important information on everything from cost basis reporting and tips on managing capital gains and losses, to frequently asked tax questions.

In this post I’ll also talk about the E*TRADE Education Center and its wealth of investment and tax related information that’s available online for reference.

I was not at all surprised to learn that, as per a recent StreetWise survey from E*TRADE , most investors aren’t using all the tools available to get maximum tax advantage. While this year’s benefits are too late to be taken off, you certainly can be better prepared for tax year 2015, which will be due in 2016.

Interestingly, some of the survey findings were even unknown to me. The avenues like tax advantaged deferred annuities were unheard of. Let’s discuss some more details on investment options that can lower your tax bills.

Strategies that can lower your tax burden

• Biggest of all, invest as much as possible in tax advantaged retirement accounts, like an IRA, Roth IRA, 401 (k) or 403 (B). You don’t pay taxes on the portion of your gross income that goes in to these types of investments. This income and any growth thereof will be taxed only in your retirement and at a lower rate than today.
• Beware that, for any reason, you take out money from your retirement fund, you must pay regular income tax at the current rate plus a penalty tax for early disbursement.
• If for any reason you want to have a taxable investment, make sure you contribute maximum permissible amount towards retirement saving.
• If you prefer to trade stocks and funds, you’ll be much better off trading within your IRA/Roth IRA accounts. That way you don’t have to bother about capital gain taxes.
  • In fact, the E*TRADE survey found that more than 45% of investors believe that trading within retirement accounts is the best approach to lower tax burden. Also, more than 60% of trading activities for young traders happens within their IRA portfolio.
• Another efficient way to reduce tax burden is to sell out losing positions. If you own a stock that lost value, you can sell it before year end to offset taxes on some of the gains you have from other stocks positions. I lost huge money during the 2008 financial meltdown. I took advantage of the loss for a few years, as I can carry forward losses in excess of $3,000 to the next year. Let’s say you own two stocks now, A and B. If A gains in value but B gets beaten down to an extent that you don’t want to hold it any longer, you can sell your position in B to offset capital gains taxes due for the profit you made by selling stock A.
• You can also hold position for at least a year. As long term capital gain tax is lower than short term. So a buy and hold strategy has its advantages, you see. I always said in my earlier posts that for individual investors, investing in good stocks is better than trading the speculative stocks.
• Investing in tax free municipal bonds are another good way to lower taxes on your investment growth. They are generally exempt from federal tax and most of the time also exempted from state taxes (especially if they’re issued by the state government or municipal corporation you reside in). But some special purpose muni bonds are not tax free. So do your research before investing. An added advantage with investing in municipal bonds is investment diversification, to lower your risk, during difficult economic conditions.
• As I mentioned earlier, there are certain tax advantaged annuities. So you get tax deferral plus guaranteed minimum return during your retirement, independent of market/economic condition. Annuities also offer good diversification for your money.

While paying taxes is good for the country’s growth, let’s face it, no one likes to pay taxes. But since there’s no alternative, we can only try to minimize tax burden.

Readers, what are some of your strategies to lower your tax bill? And are you maximizing your taxes?