Benjamin Franklin is said to have written in one of his many letters that “in this world nothing can be said to be certain, except death and taxes.” Taxes are a perhaps unfortunate, but necessary way for governments to fund basic government functions like healthcare, education, the military, and infrastructure. Taxes are of major importance, particularly for investors. The return on their investments will depend directly on the amount of taxes they have to pay. For example, an investment of $100,000 that’s 2% more tax-efficient and yields an annual return of 8% instead of 6% will save you a million dollars over the span of forty years. Below are a few tips that might help you manage, defer, or reduce taxes. Please understand that this article constitutes no financial advice and a tax professional should be consulted before taking any action.
Begin With a Tax Software
Many people consider filing tax returns a complicated affair, but it doesn’t have to be. The best tax software for investors will depend on your country and municipality, but if you start with the right software, filing your tax returns immediately becomes a much smoother process. Governments gather their money mostly through income tax on individuals and income tax on companies, which is called corporate tax. In the United States, the entity responsible for collecting these taxes is called the Internal Revenue Service (IRS). Everyone who’s ever had to file a tax return will be familiar with them.
Becoming Efficient with Taks Advantaged Accounts
If you’re an investor with multiple sources of income, understanding how to make your investment as tax-efficient as possible can yield a return that could end up saving you a good amount of money. You can save money for decades but you better invest it to meet your long-term goals. With the development of technology, it become surprisingly effortless to built up enough wealth so you won’t end up without enough money for your retirement. Robo-Advisers are the easy way to do so.
Robo Advisors are more like tax optimization bots that tell you how to optimize your portfolio to save on taxes. Now, how do you find the right Robo-Advisor for you? First you better read online reviews or comparisons between the most popular ones
Regardless of your income understanding how to make your investment as tax-efficient as possible can yield a return that could end up saving you a small fortune. Tax-advantaged accounts can allow your money to grow tax-free or allow you to defer paying tax on your money until your retirement. That’s advantageous as you’ll probably pay less taxes when you retire since your income will be less. Tax-advantaged accounts in the USA include 401ks, IRAs, Roth IRAs and more. In Canada, there is the equivalent retirement accounts called RRSPs and a unique account called a tax-free savings account (TFSA for short) that allows you to save not just for retirement but any savings goal that you have
You can save money for decades, but you better invest it in meeting your long-term goals. With the development of technology, it becomes surprisingly effortless to built up enough wealth better still if you reduce your taxes.
Know Your Tax Dates and Stay Organized
You need to know the crucial tax dates and prepare for them in advance. Know the deadline for filing income tax, the deadline for filing tax returns, the deadline to seek tax extension, and so on. This way, you can be certain you won’t pay late tax return payments.
Keep anything related to income tax or capital gains tax in a folder that you can easily pull out when you need to file your tax returns.
Know When and Where to Invest
Investments that you’ve held for less than a year are taxed at a higher rate than investments you held for more than a year. Additionally, you can offset your capital gains against investment losses, although only up to a certain amount. If your losses exceed that amount, you can carry forward your tax losses to offset capital gains in future years.
The type of security you invest in matters too. For example, you pay less tax on qualified investments such as stocks, stock mutual funds, or passively traded exchange-traded funds (ETFs). Payments made into retirement plans are tax-deductible, as are contributions to charity.
There are many more ways to be more efficient when it comes to paying taxes. If you already spend hours researching what stocks or bonds to invest in, dedicate some portion of that time to taxes as well. It could prove to be a worthwhile investment of your time.