Taxpayers pay unnecessary taxes every year because they are ignorant of the tax laws. For example, a tax return client bragged to me about over $50,000 in dividends, all foreign companies. That client paid TWICE as much tax as he would have with domestic dividends, 32% versus 15%. To help remedy this situation, I recently sent my guide, The Tax Wizard’s Thoughts for Investment Advisors to over 50 top investment advisers.
Capital gains and losses. Long Term Capital gains (on investments held 12 months or more) are taxed at lower rates than ordinary income, generally half as much or less. For short-term gains, the tax rate can hit 40.8%. Timing is everything.
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Pick your cost. A great trick: If you purchased several blocks of stock over a period of time, you can specify which you are selling, saving taxes by selecting those that cost the most.
Capital Losses. You can save taxes by selling loss investments toward year end to offset up to 100% of your gains from such sales. You can use excess losses to offset up to $3,000 of other taxable income. If yet more losses remain, you can carry them forward to offset gains in future years.
“Qualified dividends” are those from domestic US companies. Qualified dividends are taxed at lower rates, just like long term capital gains.
3.8% Surtax on net investment income. This tax applies to the lesser of: (i) net investment income or (ii) “modified adjusted gross income” that exceeds $250,000 for joint filers, $125,000 for married separate filers or $200,000 for other taxpayers. Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income. See Form 8960.
Net investment interest. If you pay interest on debt used to purchase investments, like margin interest or interest on a loan to purchase an investment partnership, S corporation, LLC or corporation, the interest can be deducted on Schedule A as an itemized deduction up to the amount of net investment income. You can elect to increase net investment income with long term capital gain or qualified dividends but they are then taxed as ordinary income.
More important rules and strategies in the next WealthWISe.