Taxes and Investments: Keep More of What You Earn

Investing involves more than making smart choices. You also need to consider how to keep what you earn! Here are just a few ideas to help you lessen your income tax burden, so you can hold on to more of your investment earnings.

Invest for the Long Term

If assets are held for a year or less, earnings are considered short-term capital gains and taxed at ordinary income rates, which can be as high as 37 percent. But you may delay realizing gains by investing for the long term.

  • Try to hold an asset for more than a year; that way, earnings will be taxed at the lower long-term capital gains tax rate—currently 15 percent or 20 percent (0 percent for taxpayers in lower tax brackets).


Harvest Losses

When you do realize gains, you may be able to offset them with losses.

  • When your losses exceed your gains, you can offset up to $3,000 if single or married filing jointly ($1,500 if married filing separately) of ordinary income. The rest of your capital losses can be carried forward to be used in future years.
  • Be aware of the wash sale rule. That is, if you purchase a substantially identical position within the period that begins 30 days before you take a loss and ends 30 days after that date, you will have to delay recognizing the loss until you sell the new position.


Contribute to Charity

Potential income tax benefits from charitable donations are not limited to the cash or physical items you give away.

  • Consider gifting stock to charity if you have a large long-term gain position. You may get a tax deduction based on the fair market value of the stock at the time of the gift. Your deduction may be limited to 20 percent–30 percent of your adjusted gross income, and the excess can be carried forward for five years.


Diversify Bond Holdings

Branch out beyond Treasury bonds, which are state tax free but subject to federal tax.

  • Consider investing in municipal bonds. Interest is exempt from federal taxes and could be exempt from your state taxes as well if the bonds were issued in your state.


This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.