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Tips for Reducing Taxes on Paper Assets

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Tips for Reducing Taxes on Paper Assets


When it comes to stock investing, the Wealth Academy recommends investing for the long term. But when it does come time to sell, be sure you understand how selling shares will affect your taxes. Here are some tips for reducing your taxes for stock investments.

Hold investments for more than one year.

By keeping your stock investments for at least a year before selling, you can take advantage of the long-term capital gains rates, which are lower than short-term capital gains rates.

Use tax-advantaged accounts.

Take advantage of retirement and college savings accounts that are tax-deferred. Better yet, consider tax-free accounts such as 529 plans and Roth IRAs.

Try tax-loss harvesting.

When your investments are down, consider selling some of your shares and “harvesting” the loss to offset income on your tax return.

Donate stocks to charity.

By donating stock you’ve held long term to a qualified charity, you avoid capital gains taxes and may be eligible for a tax deduction for the full market value of the stock.

Sell when your tax bracket is low.

If your income varies by year, consider the strategy of realizing gains in a low-income year to keep your capital gains taxes as low as possible. If your income is $41,675 or less, your long-term capital gains rate is zero.



Investing in bonds is a good way to let your money grow at low risk. When the bonds mature, the interest you earn is usually taxable. However, there are a few exceptions.

Use the education exclusion.

You can skip paying taxes on interest earned with Series EE and Series I savings bonds if you’re using the money to pay for qualified higher education costs. That includes expenses you pay for yourself, your spouse, or a qualified dependent.

Roll the money into a college savings account.

You can roll savings bonds into a 529 college savings plan or a Coverdell Education Savings Account (ESA) to avoid taxes. A 529 plan will allow the money to continue to grow tax-free as long as it is used for educational expenses.

Invest in Series I savings bonds.

Series I savings bonds are not subject to state or local taxes.


Mutual Funds

Mutual fund taxes typically include two taxes: (1) tax on dividends and earnings while the investor owns the mutual fund shares, and (2) capital gains taxes when the investor sells the mutual fund shares. That means you may owe tax on mutual funds you’ve invested in, even if you haven’t sold any of the shares or received any cash from your investments. Here are some ways to reduce those taxes.

Hold funds long term.

Like with stocks, holding mutual funds for more than a year will give you the more favorable long-term capital gains rate.

Buy shares through your IRA.

If you put money in a traditional IRA, your investments grow tax-deferred. If you put money in a Roth IRA, your investments grow tax-free.

Buy shares through your 401(k).

If you put money in a traditional 401(k) account, taxes are deferred until you withdraw the money.

Know what kinds of investments the fund makes.

If you don’t want to be taxed on dividends, look for a mutual fund that invests in stocks that don’t pay dividends. If you don’t want to pay frequent capital gains taxes, consider index funds that infrequently sell their investments.

Time your fund purchases.

If you buy shares in a fund just before the year-end distribution occurs, you’ll have to pay tax on any gains incurred from shares throughout the entire year, including before you owned the shares.

Consider the fund’s turnover rate.

Since a capital gain must be reported each time shares are bought or sold, funds that trade securities frequently may accumulate more taxable gains.


Sources: ExperianFidelityNerdwalletSmartAssetThe Balance


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