Tax Tips for the Individual Investor

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Tax Tips for the Individual Investor

A few easy tax recommendations for record-keeping, investing, and reporting may help most investors save money.

Reinvest Dividends

By automatically reinvesting dividends in the fund, investors may minimize capital gains on the sale of mutual fund shares. Dividends reinvested enhance your investment in a fund, thus lowering your taxable gain (or increasing your capital loss).

Assume you initially invested $5,000 in a mutual fund and received $1,000 in dividends that were reinvested in more shares over time. If you then sell your fund interest for $7,500, your taxable gain is $1,500 ($7,500 less the initial $5,000 investment and the $1,000 reinvested dividends). Many individuals fail to deduct their reinvested dividends, resulting in a greater tax bill.

Key Takeaways

  • Taxpayers may save money by reinvesting dividends to decrease taxable profits or investing in tax-free municipal bonds.
  • Maintain proper records of your reinvested dividends, and check the laws that apply to your specific case each tax season.
  • Capital losses may be used to offset capital gains, decreasing the tax liability.

While the difference in taxable income in this example may not seem to be significant, neglecting to take advantage of this provision may cost you in the long term. By foregoing tax savings now, you forfeit the potential compounded growth those additional dollars would have generated in the future, and if you fail to take reinvested dividends into account year after year, your tax-adjusted returns will suffer.

Keep proper records of your reinvested dividends, and every tax season, evaluate the tax regulations that apply to your circumstances.


When the stock market underperforms, investors turn for other investments. Many people seek refuge in bonds, which generally outperform stocks and generate interest income. The greatest thing is that you may not have to pay taxes on all of the interest you earn. If you buy the bond between interest payments (most bonds pay semiannually), you won’t have to pay tax on the interest that had accumulated previous to your purchase. You must still report the whole amount of interest received, but you may deduct the accrued interest on a separate line.

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Municipal bonds (commonly known as munis) may provide large tax benefits. State governments or local municipalities often issue these bonds to fund a specific project, such as the building of a school or hospital, or to pay specified running expenditures.

Most munis are tax-exempt, which means the interest they produce does not need to be declared on your tax return. Those with excellent ratings and consequently little risk might be extremely appealing investments.

Reducing Taxes

Many operational expenditures may be deducted by investors who engage in small company endeavors or are self-employed. For example, if you take business travels throughout the year that need housing, the cost of your hotel and meals may be deducted as a business expenditure within certain restrictions depending on where you go. If you travel regularly, failing to include these apparently little personal costs might result in significant tax savings.

The cost basis of the purchase is an essential aspect for reporting the capital gain on the sale for homeowners who relocated and sold their house throughout the year. If your house had renovations or comparable modifications with a useful life of more than one year, you may most certainly include the cost of the changes in the adjusted cost basis of your property, lowering your capital gain and the accompanying taxes.

Tax-Deferred Programs

When you trade a stock, you are subject to capital gains tax. Using a tax-deferred account to make purchases may save you a lot of money. Tax-deferred accounts come in a variety of sizes and styles. Individual retirement accounts (IRAs) and SEP plans are two examples.

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The funds are not taxed until you remove them, at which point they are taxed as income. Because you’ll be retiring with little or no earned income, your tax rate will most likely be lower than it is today.

Tax-deferred accounts enhance flexibility by removing the requirement for investors to consider the normal tax consequences when making trading choices. If you maintain your assets in a tax-deferred account, you may close your investments early if they see significant price growth without incurring the higher tax rate on short-term capital gains.

Match Profits/Losses

In many circumstances, matching the sale of a lucrative investment with the sale of a losing one within the same year is a smart idea. Capital losses may offset capital gains, while short-term losses can offset short-term profits. In addition, if you have a really terrible year, you may carry over $3,000 of your loss to subsequent years.

Because there is no certainty that your assets will not change in value before you close out your position, so-called paper profits and losses do not count.

Capital gains and losses are only deducted from your tax return when they are realized.

Add Broker Fees to Stock Costs

Purchasing stocks is not free. When you switch brokerages, you must always pay commissions as well as transfer costs. When you purchase or sell stocks, the Internal Revenue Service does not allow you to deduct transaction expenses such as trading fees and commissions. However, when calculating your cost basis, you should add these expenditures to the amount you paid for the shares.

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Consider these charges to be write-offs since they are direct expenses made to assist your money in growing. After all, brokerage fees and transaction expenses are money that you pay out of pocket as an expenditure when you make an investment. Many minor brokerage fees might build up over the course of a year.

Hold on to Your Stocks

Short-term capital gains (less than one year) are taxed as ordinary income at a higher rate than long-term capital gains. The capital gains rate, for example, is limited to 15%, while the maximum marginal tax rate on regular income is 37%. When you consider the long-term benefits of compounding on the money you save on taxes today, holding stocks for at least a year may be helpful.

The Bottom Line

Many investors are anxious to learn about the next market-beating investment opportunity, but few make the same effort to reduce taxes. Tax planning is an important component of a good financial strategy. This tax season, be sure you’re doing all possible to retain your money. Also, consult with a tax professional: the savings you discover might significantly enhance your yearly return.

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