Paying taxes on investments lowers your rate of return. Investors want to maximize their gains and save money on investment taxes. The right types of investments can help you save money on taxes, and this means more money in your pocket.
Of course, there are exceptions, but the following investments are often solid choices for reducing taxes.
1. Avoid Investing in Dividend-Paying Stocks
Stocks that pay dividends are income-generating, and while it’s great to make money off of an investment, this also means that you’ll be required to pay taxes on this income. A lot of mutual funds will use the tactic of avoiding dividend-paying stocks to minimize the tax burden on their investors.
2. Aim to Avoid Short-Term Gains
Short-term gains are great, but long-term gains in the stock market are where fortunes are made. When short-term gains are realized, taxes need to be paid on the income from the sale of the stock.
Long-term gains offer better returns.
You’ll need to pay very close attention to the calendar here because long-term investments are generally considered investments that have been held for a period of more than one year.
3. Capital Gains Offsetting
When it comes to capital gains, hire an accountant that can help you with your capital gains. One tactic that is used often is offsetting these gains with losses to lower the tax burden. This legal method allows the investor to claim lower gains when they have losses in other areas.
4. Invest in Your Kids With a ROTH IRA
Kids can be left money now, and this can be done with a ROTH IRA. The tax-free compounding can turn a 7% increase annually, leading to a significant amount of money for your child over the long-term.
Money in your estate that will be left to your child will then be out of your estate, allowing you to lower the risk of state inheritance taxes.
You can also invest in a Section 529, which is designed only to be used for schooling.
5. Bond Funds
Bond funds don’t offer as high of a return as stocks in most cases, but there are municipal bond funds that are normally free from federal taxes. Tax-exempt bonds give a lower rate of return than taxable bonds because they offer significant savings.
Most municipal bonds are also free from state taxes – an added bonus.
Investors that are in high income brackets will often choose these types of bonds that offer a tax-free return even if the return is lower than other bond options available.
6. Defer Taxes with Treasury Bills
You can confidently defer your taxes slightly by strategically utilizing treasury bills. This means that you’ll only have to pay taxes on the treasury bill the year that it matures. Three- and six-month bills are the best option because you don’t have to pay taxes on the interest.
Interest taxes are also exempt on the state and local level.
So, when you want to be able to lower your tax bill the last minute, you can defer taxes through the purchase of treasury bills.