The first step is to know what tax rules apply and how taxes on investments are to be computed.These days the internet has in depth articles and tips written by experts in the field of investments and taxations that can be read and used as a baseline. If you are still nervous or uncertain then take the help of a qualified and reputed tax professional a CPA or tax lawyer. What you pay in their fees will be far less than the excess tax you will pay if you are unsure and confused on how tax on investment is to be calculated.
Here are a few tips for you to use and save money:
1. Do you know reinvested dividends in mutual funds reduce taxes? You must deduct the reinvested dividends from capital gains calculations. Remember every drop makes an ocean in the end.
2. Consider investing in bonds especially when the stock market is erratic. Bonds are a “safe haven.” Municipal bonds are tax exempt and offer great tax advantages. So, study different bonds and see how much you can save in taxes by diverting some of the funds you normally invest in the stock market to bonds.
3. If you trade online and maintain records on investments on your home computer you can claim purchase of the computer and accessories as deductibles. Find out what you are eligible for?
4. Trading in stocks means having to pay a capital gains tax. But using a tax deferred account can be beneficial. Examples of tax deferred accounts are: individual retirement account and simplified employment pension plan. Such funds are tax shelters and when you cash in on retirement you will be in a much lower tax bracket and not earning a steady income.
5. Think of balancing profits and losses. When you sell a profitable investment you should consider selling a loss making one too so that the profit gained by one sale is compensated by the loss accrued. Short term losses can be adjusted against short term gains. These are “paper gains and losses” and can be beneficial. Work out the realities of such a strategy, ask a tax consultant.
6. Be sure to deduct costs like broker’s fees and commissions on purchase and transfer of stocks.These can be added to your costs and subtracted for sale price of stocks. Often brokerage when totaled up at the end of a year can add up to a substantial sum.
The world of investing has many aspects and it is important to know how you can save on taxes. Be methodical and maintain investment records in such a way that gains, losses, costs, and more are all available on tab. Use a personal finance software or spreadsheet. Online tools like Gainskeeper will help you keep track of your investments. Captial gains needs to be computed taking into consideration cost basis as well as selling price. Great guidelines for investors on taxation are at: www.fairmark.com/capgain/capgain.htm .
So invest wisely and try not to lose from investments by paying excess tax.
Barry Allen is a freelance writer for Online Tax Firm, the premier website to find tax, return tax, tax software, free tax filing, sales tax, services tax,income tax, property tax and many more.