April 15 is almost here, and millions of Americans have discovered that they paid more in taxes than they wanted to. But if you want to owe less in tax, it pays to start thinking about smarter strategies now.
Here are four things to keep in mind as you look for ways to cut your tax bill for 2014 and beyond.
1. Keep high-tax investments in retirement accounts.
Whether you use a Roth or a regular IRA or 401(k), making sure that you put investments that produce a lot of taxable income into tax-favored retirement accounts can save you a bundle in taxes. If you have a mix of retirement and regular taxable accounts, investing your taxable money in low-tax alternatives like stocks that pay little or no dividends can let you gain overall portfolio balance while still minimizing your tax hit.
2. Hold on to winning stocks longer.
Tax laws reward long-term investors. If you sell a stock only after holding it longer than a year, then you'll pay much lower taxes on your gains. The differences are bigger than you'd think: If you pay 10% or 15% on short-term gains from holding stock a year or less, you'd pay 0% on those gains if you held the stock long enough to qualify for long-term gains treatment. For those in the 25% to 35% tax brackets, the maximum long term capital gains rate is 15%, while a 20% maximum applies to top 39.6% bracket taxpayers.
3. Get a silver lining from money-losing investments.
Nothing's worse than watching a stock you own fall. But through tax-loss harvesting, you can turn those losses into tax savings. You're allowed to use capital losses on falling stocks, bonds, mutual funds, or other investments to offset any and all gains you've earned on sales of winners. In addition, if you have more losses than gains, you can use up to $3,000 of additional capital losses each year to cancel out regular income, including your salary or any interest and dividends you may have received during the year.
In order to reap those tax savings, you have to sell your losing investments. With so many people using tax-loss harvesting near the end of the tax year, getting an early start can be a smart move to beat the rush -- and the further share-price declines that often come with it.
4. Be smart about income and deductions.
There's no shortage of deductions available to attentive taxpayers. Regular IRA or 401(k) contributions can reduce your taxable income, as can using health savings accounts and medical flex-plan accounts to set money aside on a pre-tax basis. Giving to charity, paying state taxes, and claiming investment-related expenses are all things you can do by itemizing deductions. Moreover, by timing when to pay expenses that are tax-deductible, you can sometimes bunch them up in a way that produces greater overall tax savings. Similarly, if you have power to time when you receive income -- whether it's business income or deciding to sell property or investments that have risen in value -- then paying attention to the tax impact can have a huge effect.
Nobody wants to pay more in taxes than they have to. Although these tips won't succeed in eliminating your tax bill entirely in most cases, they'll nevertheless help you get the tax reductions that you're entitled to under the tax laws. Given how much of a drain taxes can be on your overall savings, cutting your tax bill will leave you more financially secure in the future.
Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.