Tax Tips for the Individual Investor

Investors are usually quite eager to learn about the next big investment opportunity out there to increase their total portfolio return, however, they are often less enthusiastic about making an effort to minimize their tax bite.  There’s money to be made by taking advantage of tax avoidance strategies.  So that you don’t overlook any opportunities for improving your bottom line, here are a few simple tax principles that can help save you money.

  • Don’t Forget to Adjust for Your Dividends. If you sell mutual fund shares that had dividends automatically reinvested in the fund over the years, then don’t forget to subtract the dividend amount from your total gains.  Let’s say you originally invested $5,000 in a mutual fund and had $1,000 in dividends reinvested in additional shares over the years. If you then sold your shares for $7,500, your taxable gain would NOT be $2,500.  You can also subtract the $1,000 reinvested dividends. Thus, your taxable gain would be $1,500.
  • Invest in Municipal Bonds. Municipal bonds (also known as “munis”) are fixed-income investments that, depending on your tax bracket, may be able to provide higher after-tax returns than similar taxable corporate or government issues. Munis offer significant tax advantages because the returns they generate do not need to be claimed when you file your tax return. 
  • Don’t Overlook Write-Offs.  Did you know that you can write off a computer you bought last year if you used the computer to place trades or manage your portfolio? You can write off a percentage of the computer’s cost based on how much you used it for investment purposes.  So if the computer cost you $500 and you use it 50% of the time for dealing with your investments, then you can write off $250 of the computer’s cost.
  • Adjust for Home Improvements.  If you sold your home last year, you can include the costs of any home improvements you’ve made over the years to the adjusted cost base of your home, thus reducing your capital gain incurred on the sale.
  • Position Capital Losses against Capital Gains. It is often a good idea to match the sale of a profitable investment with the sale of a losing one within the same year. Capital gains (or losses) are only applied to your tax return when they are realized. If you actively choose to sell (even just temporarily) a losing investment, you can successfully match your capital gains with offsetting losses, significantly reducing your tax burden.
  • Add Broker Fees to the Cost of Your Stocks. Broker commissions and/or transfer fees can be deducted from the sale price of the stocks.   These expenses are direct expenses incurred to help make your money grow.
  • Buy and Hold. Short-term capital gains (less than one year) are always taxed at a higher rate than long-term ones. The difference between the tax rates of long-term and short-term capital gains can be 13% or more in some states and countries.
  • Get expert advice. Make sure you actively take advantage of tax reduction strategies that are specifically designed to your life situation by enlisting a financial planner to guide you.  You do not want to overlook any expenses or other income-reduction techniques that could possibly improve your bottom line.

Keeping an eye on how taxes can affect your investments is one of the easiest ways you can enhance your returns over time.  I work closely with my clients to show them ways that we can manage their portfolio to minimize their tax burden.  If you would like to have a financial planning strategy session with me, book a time in my calendar.

Jerry Bergner, AAMS CMFC

This information is general in nature and is not meant as tax advice. Always consult a qualified tax advisor for information as to how taxes may affect your particular situation.

Located in Durham, NC, Integrated Life and Financial Planning is an independent financial services firm founded by Jerry Bergner, AAMS CMFC. As a Durham, NC, Financial Planner, Jerry’s mission is to help you work toward the life YOU envision for yourself and those you care about. If you need help in clarifying that vision, he can work with you on that as well! Book a consultation meeting today.