You may only think about taxes1 during the spring, but keeping them in mind throughout the year could be the key to reducing your tax liability. Consider these tax issues when planning investment strategies.
Think long-term when investing
Profits on investments sold after being held for less than a year – known as short-term capital gains – are subject to federal income tax rates as high as 39.6%. Profits on assets held for at least one year are long-term capital gains, which are usually taxed at a maximum of 15% (unless you make over $400,000 as a single filer or $450,000 as a married couple filing jointly, in which case the rate is 20%). Investment income may also be subject to a 3.8% Medicare tax.
Defer taxes when possible
Consider contributing the maximum amount to an employer-sponsored retirement plan or a traditional IRA. Any earnings will potentially compound on a tax-deferred basis. That is, you’ll pay no taxes on earnings until you begin making withdrawals, typically during your retirement when you may be in a lower tax bracket.*
Investing in municipal bonds or opening Roth IRAs may be good options for some tax-averse investors. Income from municipal bonds and bond funds may be exempt from federal, and in some cases, state and local taxes.** Although money contributed to a Roth IRA is not tax deductible, you may not pay taxes on the contributions and earnings when you withdraw them if you meet certain qualifications2.
Make losses work for you
Capital losses that exceed your capital gains may be deducted from your taxes, up to $3,000. Remaining losses can be carried over to offset gains the next year.
Keep careful records
Organize your tax records now and update them throughout the year. This is especially important when claiming deductions on your tax returns. Most transaction records should be kept for three years, although some information – such as major home improvement records – should be kept longer.
Tax rules can be complex. To learn how your investment decisions can impact your tax liability, contact a Fifth Third Bank financial advisor.