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4 Ways to Pay Less Taxes on Your Investments

If you’re considering jumping into investing (or have already started), you need to know the tactics to avoid paying massive amounts of taxes on them. We’ve compiled a list of tax tips for investors. Check them out.

by Austin Distel

Hold investments for longer than a year

Whenever you make money off your investments (aka capital gains) you are taxed on that income. However, the length of time you held the investment dictates the rate you’ll be taxed at.

These taxes, called capital gains taxes, change at the year mark. If you hold your investments for a year or less, you’ll be taxed at the short term capital gains rate, which is the same rate as income tax.

But if you hold your investments for a year and a day, you’ll get taxed at a more manageable long-term capital gains rate.

This rate can get as high as 20% for big earners, but it’s more likely you’ll pay somewhere between 0 and 15%.

Buy Municipal Bonds  

Buying bonds means you get to collect interest on those bonds, which is a great source of passive income if you buy enough.

But unless you buy municipal bonds, the IRS is entitled to a share of that interest. When you buy either city, state, or county bonds, you are exempt from paying federal income tax on those bonds. If you buy municipal bonds in your home state, you’ll be exempt from state and local taxes as well.

One thing to note is that if you sell your municipal bonds for a profit, you’ll have to pay taxes on the gain.

Sell Losing Investments   

If you’re losing money on a particular investment, you might want to consider selling it off.  Investment losses offset capital gains, so if you make $2,000 and lose the same amount, you won’t have to pay on the amount you’ve lost.

In addition, if your investment losses exceed your gains, you can use them to offset up to $3,000 in taxable income.

Put Your Money in Tax Sheltered Accounts  

Putting your investment money into tax-sheltered accounts is a great way to defer paying taxes on various investments.

Accounts like 401(k)s, 403(b)s, and certain IRA plans aren’t tax-free, but you won’t have to worry about paying taxes until you start making withdrawals. By the time you do that (barring some emergency), you’ll likely be in a lower tax bracket anyway.

 

Have more questions about investments and taxes? Shoot us an email or give us a call.

Retirement Contribution and Other Limitations for 2013

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Westchester tax preparers at Herman & Company CPA’s have all the answers to your personal finance questions!

The IRS has announced cost-of-living adjustments affecting the dollar limitations for retirement plans, deductions, and other items. Several of the limitations are higher for 2013 because the increase in the cost-of-living index met the statutory threshold. However, some limitations did not meet that threshold and remain unchanged from 2012.

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increased from $17,000 in 2012 to $17,500 in 2013. The catch-up contribution limit for those age 50 and over remains unchanged at $5,500.

The contribution limit for both Roth and traditional IRAs has increased $500 from 2012. You can contribute up to $5,500 ($6,500 if you are age 50 or older by year-end) to your IRA in 2013 if certain conditions are met (i.e., sufficient earned income). For married couples, the combined contribution limits are $11,000 ($5,500 each) and $13,000 ($6,500 each if both are age 50 by year-end) when a joint return is filed, provided one or both spouses had at least that much earned income.

Keep in mind that contributions to traditional IRAs may be tax-deductible, subject to specific limitations that increase for 2013. When you establish and contribute to a Roth IRA, contributions are not deductible, but withdrawals are tax-free when specific requirements are satisfied. In addition, there are no mandatory distribution rules at age 70 1/2 with a Roth IRA, and you can continue to make contributions past age 70 1/2 if you meet the earned income requirement.

The 2013 limitation for SIMPLE retirement accounts increased $500 to $12,000. However, the SIMPLE catch-up contribution for those age 50 by year-end is unchanged from 2012 at $2,500.

The 2013 contribution limit for profit-sharing, SEP, and money purchase pension plans is the lesser of (1) 25% of the employee’s compensation-limited to $255,000, an increase of $5,000 from 2012 or (2) $51,000, an increase of $1,000 from 2012.

The social security wage base, for computing the social security tax (OASDI), increases to $113,700 in 2013, up from $110,100 for 2012. The additional $3,600 for 2013 represents an increase of 3.3% in the wage base.

Finally, the annual exclusion for gifts increased by $1,000 and is $14,000 in 2013.

Please contact Westchester tax preparation firm Herman & Company CPA’s if you have any questions!

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.