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Tax Considerations with Investments

September 30, 2014

Some unique tax implications to consider when looking at your investment options.

Updated: November 17, 2015

Though you cannot make investment decisions based entirely on tax implications, you should be aware that tax treatment of investments differs based on a number of factors. There are many ways you can ensure that you are making the most practical investment decision.

Tax saving strategies

  • Capital Gains: To cut tax on any long term capital gain, hold on to the investment until you’ve owned it for more than a year.
  • Think about selling unrealized losses to offset your gains.
  • Mutual funds: Save tax dollars by choosing funds that provide primarily long-term gains (lower long-term rates).
  • Avoid the “wash sale rule”- The wash sale rule prevents you from taking a loss on a security if you buy a substantially identical security within 30 days before or after you sell the security that created a loss. Only when you sell the replacement security can you recognize the loss. There are ways to avoid this, such as waiting 31 days to repurchase the same security.
  • The 0% rate- For a long term gain that would be taxed at 10 or 15% (depends on the taxpayer’s ordinary-income), the 0% tax rate applies.
  • Bond swaps- A bond swap involves selling a bond, taking a loss, and then immediately buying another similar bond from a different issuer. You will get a tax loss with this because the wash sale rule doesn’t apply as the bonds aren’t considered identical.
  • Losses- Be aware that if net losses exceed net gains, you can only deduct $3,000 (for married couples filing separately, the deduction is $1,500) of the net losses per year against ordinary income. Loss carryovers can be a valuable tax saving tool, but carryovers disappear once the taxpayer dies, so sell investments at a gain now in order to absorb these losses!

Besides gains and losses, you will want to consider other tax consequences on investments like:

  • Interest on investments- Since interest income is generally taxed at an ordinary income rate, it may be a better tax decision to invest in stocks that pay qualified dividends.
  • Investments that produce dividends- Instead of a higher ordinary-income tax rate, qualified dividends are taxed at a long term capital gains rate.
  • Bonds- Bonds produce interest income, but they are treated a bit differently tax wise. Corporate bond interest, for example, is entirely taxable for both state and federal purposes.

Before making an investment decision, don’t ignore the tax implications of your potential decision! It is important to be conscious of the effects of buying, holding, and selling an investment. After considering both your desired return and risk tolerance, be sure to analyze all applicable tax consequences of your investment, including whether the income will be subject to the additional net investment income tax.

Questions? Contact any member of our Tax Services Group or refer to the KLR Online Tax Guide.

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