According to U.S. News, the new tax plan proposed by President Donald Trump may remove the net investment income surtax, which is currently at 3.8 percent. If the surtax is eliminated, the top federal tax rate for long-term capital gains will be reduced to 20 percent for high-income earners. While the proposed tax code may provide some relief, it may not be passed. If you feel that you paid more than you should in investment taxes this year, it is not too early to start planning for your 2018 tax bill.
Harvest Investment Losses
Harvesting investment losses is something that is normally done at the end of the year, but it can be beneficial to do it at other times as well. Robert Waskiewicz from the Wescott Financial Advisory Group said that a good example of harvesting losses is selling a mutual fund that is losing money before the payment of dividends or capital gains. It is essential that you harvest investment losses in a strategic manner. If you trade frequently to lock in gains and losses, you may experience tax inefficiencies, which can in turn lead to reduced net investment return. Long-term investing should be the strategy used for taxable accounts, because it is intrinsically more tax-efficient.
Before you start to harvest investment losses, you need to calculate the amount of tax offset you can get from the sale of a certain asset. Also, take a look at the track record of the investment. Regardless of whether it is an equity or bond, you should get rid of it if it has not been performing as well as expected. If you think that the investment has a good chance of rebounding in the future, selling half of your shares is an option you may want to consider.
Locate Your Assets in the Right Places
You may have holdings that you trim back as they approach the top limit of their trading range and get back in as they fall back to their normal bottom. In order to minimize the tax friction that comes with this approach, you should locate such holdings in tax-deferred accounts. If you belong to a high tax bracket, it is a good idea to utilize municipal bonds and other investments that are not subject to federal or state income tax. Another strategy for reducing investment taxes is investing in a life insurance policy and using it as a Roth IRA alternative. If you are an angel investor, you may be eligible for federal and state tax breaks if you invest in a startup. According to investor Jason Sugarman, those who wish to remain profitable for a long time should invest in tech-oriented startups, because these startups have a better chance of surviving in the future.
Investment taxes can take a significant chunk out of your profits, but you can keep them at a minimum by following the above-mentioned strategies.