Investors should be aware that there are legal methods to reduce, defer, or even eliminate taxes on investment gains, allowing them to keep a larger amount of their income.
Your investment income is subject to taxation by the Internal Revenue Service (IRS), but it is treated differently from salary income. These distinctions impact not only the tax rates you pay but also the timing and methods of taxing investment income.
Taxes
Investors should be aware that there are legal methods to reduce, defer, or even eliminate taxes on investment gains, allowing them to keep a larger amount of their income.
Moreover, if you want to minimize your tax burden in 2023, you should prioritize tax planning from the beginning of the year. Here are a few advantageous actions to take early in 2023.
Money contributed to a traditional IRA cannot be taxed by the IRS. The benefit of IRAs is that you have the entire year to fund one. In actuality, you have until the following year’s tax deadline to fund your IRA, so you have more than a year to do so.
Contributions are favorable if you have health insurance that is compatible with a health savings account or HSA. As with standard IRAs, HSA contributions are tax-deductible.
In addition, with HSAs, you receive tax-free growth on the money you invest rather than use it immediately, as well as tax-free withdrawals as long as the funds are used for healthcare expenses.
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Strategic Investment
One thing you should consider, though, is examining your investments to determine if you possess a persistently underperforming item. In this situation, selling it for a loss could reduce your annual tax liability.
Not only can investment losses be used to offset investment gains, but they can also be used to offset some ordinary income. So let’s assume you lose $5,000 on a stock, but your brokerage account remains unchanged.
You may use your loss to offset up to $3,000 of normal income, and you may carry forward the remaining $2,000 of your loss into the following tax year.
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