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3 Tax Deductions Investors Should Strongly Consider

By Brian Stoffel - Apr 3, 2016 at 2:39PM

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The savings can be huge...if you play it right.

Investors have their own set of deductions to consider. Image source: Simon Cunningham, via Flickr.

Before we even get started, I have to level with you: Not all of these suggestions are technically tax deductions. But they do represent simple ways investors can reap the financial rewards of their investments, while legally turning over less to the government.

Some are well known, others not. Here are what I consider to be the top three.

Investment-related miscellaneous itemized deductions
If you fill out the "Miscellaneous Itemized Deductions" section of your Form 1040, there's a threshold you have to meet before those deductions can start representing tax breaks. According to the IRS, "You can claim the amount of expenses that is more than 2% of your adjusted gross income." 

In other words, if your household's adjusted gross income is $100,000, and you have $5,000 in miscellaneous itemized deductions (from investing or other expenses), then the first $2,000 don't count as deductions (2% X $100,000), but the other $3,000 will reduce your tax basis.

What kinds of things qualify as investment-related deductions? Consider:

  • You can deduct depreciation from your home computer if it's used to produce income for you via investments. More on that here.
  • Any charges you pay to participate in an automatic dividend reinvestment plan (DRIP) are tax deductible.
  • If you lost any money in ponzi-type schemes (think Bernie Madoff), the amount of your losses from your original basis are tax deductible.
  • Tax preparation fees -- which are often very important to investors -- are deductible.
  • Any investment counseling you get, which includes publications (like The Wall Street Journal), and newsletters, like those offered here at The Motley Fool, are tax-deductible investment expenses.

However, there are some common expenses that don't fall under this category, and are not tax-deductible after you meet your threshold. The most important are:

  • Any fees you pay your broker to buy or sell stocks. These are instead figured into the cost basis of your investments.
  • Attending investing seminars.
  • Any money you might have to spend (transportation, lodging, etc.) to attend a stockholders' meeting of a company you own stock in.

For some, this can prove to be a valuable deduction. For more information on all that qualifies, I suggest checking out the official IRS page on Miscellaneous Itemized Deductions here.

Own your stocks for more than a year
Anyone who reads The Motley Fool knows we are long-term, buy-to-hold investors at heart. Although there will be isolated circumstances where holding a stock for less than a year might make sense, that is the exception -- not the rule -- to what we preach.

Luckily for our readers, this also increases the chances of getting a nice tax break. You see, if you hold your investments for more than a year, your capital gains are taxed at different rates than they would be if you owned a stock for less than 365 days.

Here's how it breaks down by what marginal tax bracket you fall into:

Tax Bracket

Short-Term Capital Gains Tax Rate

Long-Term Capital Gains Tax Rate

10%

10%

0%

15%

15%

0%

25%

25%

15%

28%

28%

15%

33%

33 %

15%

35%

35%

15%

39.6%

39.6%

20%

Data source: IRS.

Depending on your taxable income, holding your investments for more than a year can make a huge difference. Consider the family that has taxable income of $100,000 -- which puts them in the 25% tax bracket. If they realized capital gains of $10,000 during the year, they'd pay $1,000 less in taxes if they had owned their stocks for more than a year.

Avoid capital gains altogether
If you look at the chart above, you might notice a very interesting anomaly: Those who fall in the 10% or 15% tax bracket pay absolutely nothing in capital gains if they held their stocks for more than a year.

While it might seem that families in this tax bracket wouldn't normally be investing anyway, I've shown how a family taking in well over $100,000 per year could still end up in these brackets after all possible deductions are taken into consideration.

The fact of the matter is, if your family falls under this category, it might make sense to sell some of your big gainers -- up to a point -- to lock in those tax-free gains. If you still want to own the stock, you can buy it back 30 days later.

Hopefully, by taking these three strategies into account, you can make your tax bill this year more palatable.

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