Published on 16/03/2021
The 2020 pandemic also saw millions of people open investing accounts. A lot of it can be attributed to cheap stock prices during the pandemic and the additional time that people had. The bottom line is that investing skyrocketed in 2020 and so, there are millions of people who will have to pay Taxes on their Investment returns.
You will be bound to pay taxes when your investment generates income. When you make a profit on this investment, you have to pay a certain amount of tax to the Government. The tax on your investment will also vary and depend on the type of income generated by your investment.
Both long-term capital gains and dividends on stocks are taxed at the same rate. If your investment earned an interest amount on its own, you will have to pay a higher tax on it. Since the financial year has come to an end, there are measures you can take to avoid paying a higher tax on your investments in the future.
Reduce your turnover in your taxable portfolio
If you hold stocks and/or Mutual Funds for more than 12 months, you will have to pay a lower capital gains tax. However, you need to be cautious of the turnover ratio of your mutual funds since the gains ultimately pass on to you.
Claim tax benefits in retirement accounts
Having a retirement account can help you decrease the amount of taxes on your investments. Transactions in your retirement account are non-taxable- giving you a leeway to save money. Additionally, you can choose to have a Roth account for aggressive trading purposes and a non-retirement account for other tax-efficient investments.
Hire a tax professional
As a non-finance and non-tax person, you may not be aware of the nitty-gritty of investing and taxes. A tax pundit, on the other hand, can help you with tricks of the trade to minimize the taxes you owe. Each individual will require a different investing strategy to curb taxes.
Sell some investments at a loss
If you notice some stocks in your portfolio that are plummeting and you expect them to take a further dip, it is better to exit that stock. Of course, you will make some loss but it will save you from a much bigger loss if the stock would have tanked. What’s more- if your losses are more than your gains, you claim losses of up to $3,000 against your income.
Avoid buying mutual funds at year-end
To minimize your taxes, wait after the year ends to buy mutual funds. If you buy mutual funds before the year ends, you will have to pay taxes on them. These aftermost mutual funds pay out capital gains towards the year-end. Although you will gain the money, you will have to pay additional taxes on it.
Even if you have to pay a substantial amount of taxes this year, take it with a pinch of salt and rejoice in the fact that at least you made some money and put your money to wise use. Talk to our tax professionals at [email protected] for more insight into how you can save on taxes on your investments in the upcoming financial year.