Tax-Smart Investing Tips: 6 Strategies for Reducing the Tax Burden on Your Investments

When you’re in the business of making money, you want to keep as much of it as possible. Governments often make this challenging by taking significant sums of it as taxes.

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While you can’t get around paying taxes, you might be able to reduce the tax burden on your investments by taking some of the following actions:

Use Accountants

Many people only reach out to accountants for help filing their individual tax return form. However, accountants can also be an invaluable source of information for investment advice and tax law information.

Reach out to your local accounting team when the time comes to invest in something new. You might be surprised by how much knowledge they have on how to save your hard-earned money.

Explore a 1031 Exchange

Selling properties as an investor can be frustrating when you know you’re liable for capital gains tax. However, you might be able to defer your tax by taking advantage of the IRS’s 1031 Exchange option.

1031 Exchange refers to Section 1031 of the Internal Revenue Code, in which you can sell a property and buy a like-kind property without paying any capital gains tax. However, all proceeds from your first sale are held in escrow until you purchase your like-kind property. You also have a limited window to complete the transaction and must buy your property for the same purpose as the one you sold.

Use Tax Loss Harvesting

Tax loss harvesting describes selling securities or assets at a net loss to offset how much capital gains tax you owe from selling profitable assets. Once you’ve sold your investment or security, you can use the proceeds to purchase another. Many investors use this strategy to preserve their portfolio value and reduce tax burdens simultaneously.

Prioritize Passive Investments

Active investing can provide investors with substantial gains. You’re actively buying and selling financial assets like stocks, securities, and real estate at bottom-dollar prices before selling them for great profit. While this option suits those treating investing as a full-time job, you can be liable for high capital gains taxes.

In contrast, passive or buy-and-hold investments can provide great returns without the same taxes. Rather than selling your assets, you hold onto them and make passive gains over long periods. Best of all, it’s been proven time and again that passive investments outperform active ones.

Give to Charity

We all love the feel-good factor of donating money to charitable organizations. However, you can also win two-fold by enjoying the tax benefits.

You’re probably already aware that donating to charities can reduce your taxable income. But did you know that donating highly appreciated securities like real estate can be even more lucrative? Rather than paying capital gains tax when you sell it, you can donate the real estate and obtain a tax deduction.

Open Tax-Efficient Accounts

To make tax savings, you don’t have to be a savvy investor with multiple properties, stocks, and other assets. You can be an everyday person with retirement or health savings accounts. IRAs, 401(k)s, and HSAs typically offer tax-free growth on your investments.

All contributions to 401(k)s and IRAs are pre-tax. You simply need to make income tax payments on future distributions. Health savings accounts offer multiple tax benefits, such as deductible contributions, tax-free withdrawals for qualified medical costs, and tax-deferred growth.

Taxes are unavoidable. We all must pay them to remain contributing members of society. However, that doesn’t mean you must pay as much as you do now. Try these tax reduction strategies and see how much money you can save.

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