Tax Advice For Investors

Investing can be a great way to build wealth without putting in a lot of effort. That could be why so many Americans do it. According to the Pew Research Center, 52 percent of American families are invested in the stock market in some way, mostly through 401(k)s and retirement accounts, with 14 percent investing directly in individual stocks. Saving money on taxes is an important part of any good investment strategy. Whether you began investing in 2020 or have investments from previous years, there are some strategies you can use when filing your taxes this year.

Take Advantage of Eligible Tax Deductions

Make sure to claim eligible tax deductions for your investments when filing your taxes. If you lost money when you sold your investment in 2020, you can use your capital losses to offset your capital gains. In 2020, if your capital losses exceed your capital gains, you can claim a capital loss deduction of up to $3,000 per year ($1,500 if married filing separately). If you lose more, you can carry your losses forward to future years. Fill out Schedule D and Form 8949 to claim this deduction.

If you owned stock in a company that went bankrupt and became worthless in 2020, you will be able to claim a total capital loss. To prove the bankruptcy to the IRS, keep documentation such as the company’s cancelled stock certificates or evidence that the stock isn’t being traded anywhere.

You can deduct investment interest expenses from your net investment income if you itemise your deductions. Margin interest from margin loans, which is money borrowed against the value of mutual funds or stocks, can be included in investment interest.

Rather than cash dividends, look for more stock.

Every quarter, you may receive cash dividends on the equities you hold. You will have to pay taxes on your cash dividends if you reinvest them. However, if a corporation offers you more stock instead of cash dividends, you may not have to pay taxes on your stock until you sell it. Keep in mind that if the corporation offers you to pick between additional shares and cash dividends, even if you choose additional shares, this tax benefit will not apply.

Recognize the Difference Between Short and Long-Term Capital Gains

When it comes to investment, there are two types of gains and losses: short-term and long-term. Short-term gains or losses are considered short-term if you hold an asset for less than one year, whereas long-term gains or losses are considered long-term if you hold an asset for one year or more. Long-term gains are usually taxed at a lower rate than salaries or wages.

Short-term gains, on the other hand, are taxed as regular income. This means that you will have to pay that proportion regardless of your tax bracket. If you can, attempt to maintain your investments for more than a year to take advantage of the lower capital gains tax rates, which range from 0% to 20% depending on your income.

Retirement Accounts Can Benefit From Tax Breaks

It’s usually a good idea to put money aside for retirement. You may already know that if you’re under the age of 50, you can contribute up to $19,500 per year to your employer-sponsored 401(k), and if you’re 50 or older, you can contribute up to $26,000 per year. You make a pre-tax contribution to it. This means that you will not be required to pay income taxes on your contributions. Only when you withdraw from it will you have to pay income taxes.

Traditional IRAs are also tax-deductible, with gains growing tax-free. Again, you only pay income taxes when you take money out of your account. If you’re under the age of 50, you can contribute $6,000 per year to an IRA, and if you’re 50 or older, you can contribute $7,000 per year. Consider the Retirement Savings Contributions Credit (Saver’s Credit), which may allow you to receive a tax credit for making eligible contributions to your IRA or employer-sponsored retirement plan. You may be entitled for a credit if you are 18 years old or older, not reported as a dependant on another person’s return, and not a student. The credit amount varies according on your adjusted gross income: 50%, 20%, or 10% of contribution, with a maximum credit of $1,000 ($2,000 if married and filing jointly).