Be A Tax Savvy Investor

Take advantage of long-term capital gains rates

Hold stocks and mutual funds for more than twelve months to have your gains taxed at lower capital gains rates.

Consider tax-advantaged investments

Municipal bonds are issued by state and local government agencies. The interest is tax free at the federal level, but may be subject to the alternative minimum tax. Those issued by the state or municipality where you live are tax free at the state or local level as well.

Sell investments at a loss

If you have stocks or mutual funds in a taxable account that are worth less than you paid for them, and your losses exceed your gains, you can take losses of up to $3,000 against your taxable income. Be sure to evaluate selling costs and the investment’s future potential first.

Watch out for the wash sale

You can sell mutual fund or stock losers and buy them back again if you feel they are good long-term investments (but make sure you wait at least 31 days before you buy them back or the IRS will disallow your loss).

Don’t buy mutual funds at the end of the year

Mutual funds may pay out capital gains accrued throughout the year as a taxable distribution toward the end of the year (even if you just bought the fund, you’ll owe taxes on this payout!). Wait until after the distribution is made if you wish to minimize your tax bill.

Know the limit if you’re selling your home

Qualifying homeowners are exempt from the first $250,000 of capital gains ($500,000 if married filing jointly) when they sell their home.

Understand the different tax rates for dividends versus interest

Qualified dividends paid from stock investments are taxed at the same rate as long-term capital gains. Interest earned on investments such as CDs, savings accounts, and money market funds, however, are taxed at higher ordinary income tax rates.

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