Investing Strategies That Can Lower Your Tax Bill


The last few months of the year means pumpkin spice, holiday fun and…preparing for tax season.

While that last one might not be exactly what you want to be thinking about right now, keeping your tax strategy in mind when it comes to investing can help you hold on to more of your money. And that’s definitely something worth celebrating. Here are four steps you can take to keep your tax bill down.

1. Hold on for the long-term.

Fortunately, you don’t have to worry about paying taxes on gains your stocks made until you sell them, which means putting that off for a while can be a good strategy. If you sell your stocks within a year of purchasing them, and they’ve appreciated in value, they’re subject to short-term capital gains tax. That’s equal to your ordinary income tax rate—up to 39.6 percent for the 2016 filing year—and higher than the long-term capital gains tax rate, capped at 20 percent.

So it typically pays off to hold your stocks for at least one year and a day. (Plus, focusing on your long-term goals is generally a smart investing strategy overall.)

2. Look for dividend-yielding stocks.

Dividend-paying stocks are great for investors, in general, because they pay you while you continue to hold onto an investment. They’re even better if they pay qualified dividends, which are taxed at the lower, long-term capital gains rate (as opposed to non-qualified, which are taxed at your ordinary income rate.)

Qualified dividends must be paid by a U.S. corporation or qualified foreign corporation from certain types of funds. (Note: The payer should notify you if they are paying you qualified dividends, but you can find a more detailed definition from the IRS.) To be sure you nab the advantaged rate, you must have held the stock for more than 60 days within a 121-day period surrounding the payout date.

3. Make the most of your tax-advantaged retirement accounts.

If you’re investing in a 401(k), Individual Retirement Account (IRA) or similar retirement plan, there are tax benefits.

“It’s often beneficial for investors to utilize various tax-advantaged accounts to shield income, such as interest, dividends and capital gains, from current taxation,” says Jeff Levine, Certified Public Accountant and chief retirement strategist for IRA consulting firm Ed Slott & Co. (In other words, you can defer taxes you’d otherwise have to pay now on interest, dividends and capital gains if you were investing in a non-tax-advantaged account.)

In addition, maximizing your contributions to a Traditional IRA or 401(k) can lower your taxable income. You can deduct whatever you contribute to a 401(k), up to a maximum of $18,000 in 2016. For IRAs, the contribution limit this year is $5,500 if you’re under 50. If neither you or your spouse have access to an employer-sponsored plan, you can typically deduct the full amount of your contribution. But if you (or your spouse) are covered by a plan at work, your deduction may be limited.

4. Offset your losses.

If you’re already planning to rebalance your portfolio or sell some stock, think about offsetting your gains with losses. “Psychologically, it’s not always easy to sell an investment at a loss, but it often makes good sense from a tax perspective,” says Bryan Koslow, a Certified Financial Planner and Certified Public Accountant with Clarus Financial in New York.

Vid Ponnapalli, a Red Bank, N.J.-based Certified Financial Planner and founder of Unique Financial Advisors, offers this example: If you bought one share of Stock A for $10 and want to sell it at $50, you’d owe taxes on that $40 gain. If you also own one share of Stock B, which you bought for $50 and is now priced at $10, you could sell it in the same year and deduct your $40 loss to wipe away your $40 gain from Stock A on your tax bill. The only catch is you can’t buy that stock or a similar one again for 30 days. (It’s called the wash-sale rule.)