| |
| |
|
Investing Information |
|
|
|
Investors: Avoid These 5 Common Tax Mistakes
For many investors, and even some tax professionals, sorting through the complex IRS rules on investment taxes can be a nightmare. Pitfalls abound, and the penalties for even simple mistakes can be severe. As April 15 rolls around, keep the following five common tax mistakes in mind - and help keep a little more money in your own pocket. 1. Failing To Offset Gains Normally, when you sell an investment for a profit, you owe a tax on the gain. One way to lower that tax burden is to also sell some of your losing investments. You can then use those losses to offset your gains. Say you own two stocks. You have a gain of $1,000 on the first stock, and a loss of $1,000 on the second. If you sell your winning stock, you will owe tax on the $1,000 gain. But if you sell both stocks, your $1,000 gain will be offset by your $1,000 loss. That's good news from a tax standpoint, since it means you don't have to pay any taxes on either position. Sounds like a good plan, right? Well, it is, but be aware it can get a bit complicated. Under what is commonly called the "wash sale rule," if you repurchase the losing stock within 30 days of selling it, you can't deduct your loss. In fact, not only are you precluded from repurchasing the same stock, you are precluded from purchasing stock that is "substantially identical" to it - a vague phrase that is a constant source of confusion to investors and tax professionals alike. Finally, the IRS mandates that you must match long-term and short-term gains and losses against each other first. 2. Miscalculating The Basis Of Mutual Funds Calculating gains or losses from the sale of an individual stock is fairly straightforward. Your basis is simply the price you paid for the shares (including commissions), and the gain or loss is the difference between your basis and the net proceeds from the sale. However, it gets much more complicated when dealing with mutual funds. When calculating your basis after selling a mutual fund, it's easy to forget to factor in the dividends and capital gains distributions you reinvested in the fund. The IRS considers these distributions as taxable earnings in the year they are made. As a result, you have already paid taxes on them. By failing to add these distributions to your basis, you will end up reporting a larger gain than you received from the sale, and ultimately paying more in taxes than necessary. There is no easy solution to this problem, other than keeping good records and being diligent in organizing your dividend and distribution information. The extra paperwork may be a headache, but it could mean extra cash in your wallet at tax time. 3. Failing To Use Tax-managed Funds Most investors hold their mutual funds for the long term. That's why they're often surprised when they get hit with a tax bill for short term gains realized by their funds. These gains result from sales of stock held by a fund for less than a year, and are passed on to shareholders to report on their own returns -- even if they never sold their mutual fund shares. Recently, more mutual funds have been focusing on effective tax-management. These funds try to not only buy shares in good companies, but also minimize the tax burden on shareholders by holding those shares for extended periods of time. By investing in funds geared towards "tax-managed" returns, you can increase your net gains and save yourself some tax-related headaches. To be worthwhile, though, a tax-efficient fund must have both ingredients: good investment performance and low taxable distributions to shareholders. 4. Missing Deadlines Keogh plans, traditional IRAs, and Roth IRAs are great ways to stretch your investing dollars and provide for your future retirement. Sadly, millions of investors let these gems slip through their fingers by failing to make contributions before the applicable IRS deadlines. For Keogh plans, the deadline is December 31. For traditional and Roth IRA's, you have until April 15 to make contributions. Mark these dates in your calendar and make those deposits on time. 5. Putting Investments In The Wrong Accounts Most investors have two types of investment accounts: tax-advantaged, such as an IRA or 401(k), and traditional. What many people don't realize is that holding the right type of assets in each account can save them thousands of dollars each year in unnecessary taxes. Generally, investments that produce lots of taxable income or short-term capital gains should be held in tax advantaged accounts, while investments that pay dividends or produce long-term capital gains should be held in traditional accounts. For example, let's say you own 200 shares of Duke Power, and intend to hold the shares for several years. This investment will generate a quarterly stream of dividend payments, which will be taxed at 15% or less, and a long-term capital gain or loss once it is finally sold, which will also be taxed at 15% or less. Consequently, since these shares already have a favorable tax treatment, there is no need to shelter them in a tax-advantaged account. In contrast, most treasury and corporate bond funds produce a steady stream of interest income. Since, this income does not qualify for special tax treatment like dividends, you will have to pay taxes on it at your marginal rate. Unless you are in a very low tax bracket, holding these funds in a tax-advantaged account makes sense because it allows you to defer these tax payments far into the future, or possibly avoid them altogether. David Twibell is President and Chief Investment Officer of Flagship Capital Management, LLC, an investment advisory firm in Colorado Springs, Colorado. Flagship provides portfolio management services to high-net-worth individuals, corporations, and non-profit entities. For more information, please visit www.flagship-capital.com.
MORE RESOURCES:
Google News |
|
|
|
RELATED ARTICLES
The Perfect Economy? The U.S. Waiting 20 Years Can Cost You Millions - Dont Wait Start Today Many Young people live for Today. They really don't fully understand the power of compound interest. Annuity Investment - The Whole Truth Do you ever feel like you haven't been told the whole truth? Kind of like something is missing? Well, you are not alone.With many investors awestruck over the last several years by the declining stock markets, many feel like they're out in the cold. Dumb Money Many people have, at one time or another, taken some of their hard-earned funds, and decided to put them in the stock market. These well-meaning individuals either acted on a tip they saw on CNBC, or actually believed one of those crazy faxes/emails that said XBXB @ $0. Day Trading Strategy or Stock Trading Software? The Way You Pick Stocks Affects Your Results The trading method you employ to approach the stock market can make a big difference in your results.Stock trading is a very competitive field and in order to succeed you need to FOCUS on a set of simple strategies that you can implement without hesitation. The Basics of Tax-Free UK Financial Spread Betting Financial Spread Betting (or Trading) offers a tax free method of speculating on financial markets.Quite simply, if you think a particular index, share, commodity, currency or sector will rise, you place an UP bet. Raising Capital Using a Public Company Going public in this manner is ideal for companies that may not be large enough to attract an underwriter for an IPO and those that don't need to raise capital immediately. They want to go public because of the many benefits that being a public company offers such as increased valuation, using public stock as currency to acquire other companies and assets, liquidity, prestige and to reduce the need for expensive venture capital and other financing sources. IF - The Wonders of Investing If it seems as if all investors are selling, who is buying? If trading has become entertainment for you, it may be time to refocus on profits. If your stock has reached an annual low, can it go any lower? If your stock has reached an annual high, can it go any higher? If all the television analysts jumped off a bridge, would anyone care? If your portfolio is based solely on fundamental analysis, perhaps it is time to learn technical analysis. Planning for Retirement Almost without exception, people don't start planning for their retirement early enough in their lives. Young people leaving High School or College and going into their first paid position find it difficult to look or see ahead to age sixty or sixty-five. Buying a Home - Your BIGGEST Investment This column has often focused on intangible investments like stocks that a young investor might hold in their portfolio. While these are one of the most important components of an investment plan, it is not the dominant one for most young people. What is an Investor Ready Business Plan A Business Plan, as all good entrepreneurs starting out in life should know is the foundation, or rather a springboard, towards the establishment and growth of a new business. A business plan is an essential tool for companies raising capital - and your business plan needs to be Investor Ready. Angels Investors and Their Networks What is an Angel Investor?An Angel is usually a private person who invests in small businesses. The Angel is generally a successful businessperson or entrepreneur who looks to invest in a business that has potential for growing their investment in the future. Find a Methodology and Minimize Investment Madness There are many reasons to be investing these days, and too much opportunity to not have your money working for you.However, I believe the majority of people dread having to deal with investment matters, and tend to jump into purchases and then hold their breath hoping for the best. Lessons in Transition Q: What have been the most successful approaches to attracting direct foreign investments: offering prospective investors tax breaks and similar benefits, or improving the overall investment climate of the country?Empirical research has demonstrated that investors are not lured by tax breaks and monetary or fiscal investment incentives. They will take advantage of existing schemes (and ask for more, pitting one country against another). Retirement Is A Scary Proposition If Youre Without A Plan, And Running Out Of Time Of the 75 million baby boomers nearing retirement today, many are:* Debt Ridden* Severely unprepared for retirement* Under Funded* Without a StrategyThis is a very serious problem in a country that we can all remember used to assure most people of a retirement where you are taken care of financially.We all know that social security alone is not the answer to this problem. Ask The SEC Who is the SEC and why should I ask them anything? The Securities and Exchange Commission in Washington, DC is the government bureau that regulates the securities industry. They make the regulations that all stock exchange listed companies, brokerage houses and mutual funds must follow. Investing in Car Dealerships: Doing Your Homework This article attempts to help give the investor a broader basis upon which to decide whether a dealership merits their time, money and attention.Interviewing Factories and Financial InstitutionsLenders have an affirmative duty not to promiscuously disclose the financial condition of their debtors. Getting Started Investing is Often the Hardest Part There are several reasons people give for not investing their money in things like stocks, bonds, and mutual funds. One reason is that they feel that they don't have enough money to make a serious investment, but a more common reason that many people have absolutely no idea how to go about getting started investing. How To Create Wealth In The Stock Market First and foremost, an opportunistic strategy for creating wealth in the stock market is needed. And the opportunistic strategy for creating wealth in the stock market must have two ingredients, a plan and a goal. Stock Market Money Management Skills Let's start by saying: You can't be afraid to take a loss. The investors that are the most successful in the stock market are the people who are willing to lose money.
|
