Tax tips for private investors

A few simple record keeping, investing, and reporting tax tips can apply to most investors and will help you save money.

Reinvest dividends

Investors can limit capital gains from the sale of mutual fund shares by automatically reinvesting dividends in the fund. Reinvested dividends increase your investment in a fund and effectively reduce your taxable income (or increase your capital loss).

For example, let’s say you originally invested $ 5,000 in a mutual fund and reinvested $ 1,000 in dividends in additional stocks over the years. Then, if you sold your share of the Fund for $ 7,500, your taxable gain would be $ 1,500 ($ 7,500 less the original investment of $ 5,000 and reinvested $ 1,000 in dividends). Many people forget to deduct their reinvested dividends and end up paying taxes on a larger amount.

The central theses

  • Tips to help taxpayers save money include reinvesting dividends to reduce taxable profits or investing in tax-exempt municipal bonds.
  • Keep an accurate record of your reinvested dividends and review the rules that apply to your situation each tax season.
  • Capital losses can offset capital gains and thus reduce tax liability.

While the reduction in taxable income in this example might not make a huge difference, if you don’t use this rule it could cost you in the long run. If you miss out on tax savings today, you lose the potential accumulated growth those extra dollars would have earned in the future, and if you forget to factor in reinvested dividends year after year, your tax-adjusted earnings will suffer.

Keep an accurate record of your reinvested dividends and review the tax rules that apply to your situation each tax season.


When the stock market is doing badly, investors look elsewhere for opportunities to invest their money. Many find refuge in bonds, which often run counter to stocks – and offer interest income on top of that. Best of all, you may not have to pay tax on all the interest you receive. If you bought the bond between interest payments (most bonds pay semi-annually), you typically don’t pay any tax on the accrued interest prior to your purchase. You will still need to report the total amount of interest received, but you can deduct the accrued amount on a separate line.

Municipal bonds (aka Munis) can also offer significant tax benefits. These bonds are often issued by state governments or local authorities to fund a specific project, such as building a school or hospital, or to cover certain business expenses.

Most Munis are tax-exempt, which means that the interest they generate does not have to be claimed on your tax return.Those with a high rating and therefore low risk can be very attractive investments.

lower taxes

Small business investors or self-employed investors can write off many business expenses. For example, if you go on business trips during the year for which you need to find accommodation, the cost of accommodation and meals can be written off as business expenses within certain limits, depending on the travel location.If you travel frequently, a lot of tax savings can be lost forgetting about these kind of seemingly personal expenses.

For homeowners who have moved and sold their home during the year, the cost base of the purchase is an important consideration when accounting for capital gains. If your home has been renovated or similarly upgraded with a useful life of more than a year, you can likely include the cost of the renovation in your home’s adjusted cost base, which will reduce your capital gain and taxes on the sale.

Tax-privileged programs

Every time you trade a stock you are subject to capital gains tax. Using a tax-privileged account to make your purchases can save you a ton of money. Deferred tax accounts come in many shapes and sizes. Individual Retirement Accounts (IRA) and Simplified Employment Pension Plans (SEP) are two examples.

You will not be taxed on the funds until you withdraw them, if the money is taxed as income.Your tax rate will likely be lower than it is now when you retire with little or no earnings.

Tax deferred accounts offer an added benefit of flexibility; Investors do not have to worry about the usual tax implications when making trading decisions. Provided you keep your funds in the tax-privileged account, you have the freedom to close positions early in the event of sharp price increases, regardless of the higher tax rate for short-term capital gains.

Match wins / losses

In many cases it makes sense to combine the sale of a profitable investment with the sale of a losing investment within the same year. Capital losses can be used against capital gains and short term losses can be deducted from short term gains. If you have an especially bad year, your $ 3,000 loss can be carried over to years to come.

So-called paper gains and losses do not count as there is no guarantee that the value of your investments will not change before you close out your position.

Capital gains and losses are only taken into account in your tax return if they are realized.

Add brokerage fees to the cost of the stock

Buying stocks is not free. You always pay commissions and you can also pay transfer fees when you switch brokerage firms. The Internal Revenue Service does not allow you to write off transaction fees such as brokerage fees and commissions when buying or selling stocks. However, these expenses should be added to the amount you paid for a share when determining your cost base.

Think of these costs as depreciation, as it is a direct expense that is incurred to keep your money growing. Because brokerage fees and transaction costs represent money that comes straight out of your pocket when you make an investment. Many small brokerage fees that are incurred over a year can add up.

Hold on to your stocks

Short-term capital gains (less than a year) are taxed as ordinary income, a higher rate than the capital gains rate applicable to long-term gains. For example, the capital gains rate is no more than 15%, while the top tax rate for normal income is 37%.When you factor in the long-term impact of compounding on the money you save on your taxes today, it can prove beneficial to hold stocks for at least a year.

The bottom line

Many investors are eager to learn about the next investment opportunity to get returns in line with the market, but few make the same effort to minimize taxes. Smart tax management is part of a successful financial plan. This tax season, make sure you do everything you can to keep your money. And talk to a tax planner: The savings discovered can significantly increase your annual return.

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