Part of building wealth involves knowing where to put your money and how long to leave it there. The best portfolio is one that you closely monitor to determine what items are moving you toward your financial goals. During times of tax rate increases it is a good idea to look at rebalancing investments. It is during those times that you may decide to sell assets that are performing poorly. Likewise, if you expect a hike in your income, taking the gain now could save you lots in taxes. Here’s five concepts on the basics of investments from a tax perspective.
What is an investment?
An investment is an activity that you engage in to generate a profitable return. The objective is to earn a required rate of return in exchange for the risk of assumed in committing cash to purchase financial instruments and other types of assets. Some examples of income generating investments include stock and mutual funds.
How do create a taxable gain on investment?
A gain on investment occurs when you sell assets for more than their original cost. This occurs during periods of increased market demand where sellers can sell high creating opportunities to earn a profit. In these cases you will need to decide if the time is right to trade in your investment as this will increase the earnings that the IRS deems taxable.
What is a tax-deductible loss?
Likewise, a loss may occur during times of economic challenge. Certain factors such as high job loss, a faltering economy, high inflation and other factors weigh in on the market’s ability to buy and sale. When the cost of the investment is lower than the what other investors are willing to pay then you are currently generating a loss and it will be necessary to determine how long you are willing to hold the investment in your portfolio and for what price you are willing to sell.
What else should I factor into my decision?
The tax rate will vary for each tax scenario. For instance, the capital gain depending upon the length of time that it was held by the owner. It also depends on the individual’s tax rate.
It is good to take a look at your entire investment portfolio to see where there are any gains. In years where you expect your income to increase and the rate on investments to do the same, would be a good time to get rid of investments that you have been planning to sell. Why? You can take advantage of lower tax on the investments that are not performing well with other items in your portfolio.
This is just one of the many strategies that tax payers can take advantage of to lower taxable income. To learn more visit the tax center at http://www.tbsusa.com.