Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



3 Simple Tax Tips to Use Now

Photo: Seth Anderson

With the tax deadline rapidly approaching, owing the least amount of money or getting the biggest refund possible is on the minds of many Americans.

However, for investors, tax time can be much more complicated and costly, if not planned for appropriately. Here are a few ways investors can help lessen their burdens this year, next year, and beyond.

Max out that IRA
IRAs are great because they allow investments to grow tax-free for years, which can tremendously help your returns over time. I recently wrote an article about this, but just as an example, consider that tax-free compounding can result in over 60% more in returns over a period of 30 years.

What a lot of taxpayers don't realize is they can still make contributions to their IRA accounts that will count for the 2013 tax year. If you are under the maximum contribution of $5,500, you have until the tax deadline to contribute. This will help lessen your future tax burden from your investments, but if your account is a traditional IRA, you have the added benefit of being able to deduct your contributions on this year's tax return, if you qualify.

Long term vs. short term
Beware of selling your winning positions too soon. The IRS defines a "long-term" capital gain as profits on an investment held for over one year. The difference in tax rates on long-term verses short-term holdings is substantial.

To illustrate this, let's consider an investor who is sitting on a $5,000 gain from a stock position that he's held for 10 months. If he sells now, his profits will be taxed as ordinary income, so if he's in the 28% tax bracket, that translates to a tax of $1,400. However, if he holds for another two months, the profits will be taxed at the long-term rate of 15%, or just $750, a savings of $650 just for holding on a little longer.

So, if you have a winning position you are considering selling that is a few months shy of the one-year mark, ask yourself if it is worth locking in those gains early at the expense of higher taxes.

About "tax loss selling"          
On the other hand, if you are holding some losers in your portfolio, the end of the year may be a good time to do some house cleaning. Now, I'm not advocating dumping stocks you believe in over the long-term simply for their tax benefits. But if you are sitting on a losing stock you have been considering selling, the end of a tax year is a good time to pull the trigger.

The IRS allows investment losses to be counted against one's taxable income. So, if you're a buy-and-hold investor and your only sale this year was to sell your J.C. Penney stock, resulting in a $2,000 loss, your income can be adjusted by that amount. This can be very significant, especially if you are on the cusp of one tax bracket, or if you made just a little bit too much to qualify for a certain credit or deduction (the tuition credit, let's say).

Final thoughts
So, why think about mainly year-end tax strategies in February? It's simple! Think about these things when making investment decisions in your portfolio. Maybe buy-and-hold is indeed the way to go. Maybe it's not so bad for your bottom line at the end of the year to cut losses in stocks you would normally hang onto. 

Finally, the biggest tax benefit of all to investors, IRA investing, should be the priority at this time of year, and regular brokerage accounts should be used after maxing out your IRA. 

By incorporating these three simple suggestions, you can take a serious bite out of your tax burden for years to come.

More ways to make retirement even better
Social Security plays a key role in your financial security. In our brand-new free report, "Make Social Security Work Harder For You," our retirement experts give their insight on making the key decisions that will help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2845192, ~/Articles/ArticleHandler.aspx, 8/27/2015 5:54:36 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

Today's Market

updated Moments ago Sponsored by:
DOW 16,654.77 369.26 2.27%
S&P 500 1,987.66 47.15 2.43%
NASD 4,812.71 115.17 2.45%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes