How to Avoid Tax Problems as an Investor
Investing can be a lucrative profession if done the right way. Of course, you need to have the knowledge, skills, and possibly a little bit of luck to turn a good investment into a great one. Yet, what most people fail to take into consideration—at least not until the last minute, is that any profitable gains need to be reported to the Internal Revenue Service (IRS).
With most solid investments like a 401K or an IRA that rolls over into another long-term account, any profitable gains earned through these types of investments are deposited back into the account. This type of profit is considered a frozen asset. Taxes do not need to be paid on this type of investment unless it is liquidated into your checking account or cashed in completely. This is then classified as additional income and must be taxed accordingly.
Determining Which Tax Bracket Your Dividends Fall
This can become quite confusing if you have several investments and are using the dividends as your primary source of income. This means that you are liquefying dividends often. These liquidations will increase your income, thus boosting you to another tax bracket. As an investor, your dividends can be quite volatile. Some dividends might be taxed in a lower or higher bracket depending on when you buy or sell.
Keeping track of such investments can get messy and if not managed properly may cost you money that could otherwise be saved for future investments. To avoid these types of problems, try following some of these helpful tax tips:
- Reduce the Amount of Taxes Owed on Your Investment
To do this, keep your investment longer than one year. Many times we are eager to earn a quick profit. While it is possible to accomplish this, you’ll also end up paying higher taxes on these fast returns. It is reported that long term capital gains have a much lower tax rate. So if you plan on cashing in on your investment, liquidate one that has been making a profit for more than a year. Chances are you will pay a reduced amount in taxes here.
- Don’t Be So Quick to Purchase Stocks
Just as you shouldn’t be too hasty to sell, so it is with purchasing. This is mainly because theIRS knows that the seller is looking to claim a capital loss deduction on their annual tax filing. The IRS states that according to the wash sale rule, “You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities.” Because of this rule, you cannot sell and buy the same stock within a 30-day period.
- Hire at Tax Consultant
Another way to avoid tax problems as an investor is consult a tax relief professional. The knowledgeable team at Success Tax Relief has been helping taxpayers prevent and resolve tax issues for over 30 years. Our job is to consult with the IRS, tax lawyers, auditors, and tax preparers to manage the best resolution for your financial matters regarding taxes. Call the professionals at Success Tax Relief today at 877-825-1179 or contact us online.