Individual Tax planning Strategies: STRUCTURE INVESTMENTS FOR TAX EFFICIENCY

Here are 6 tips to structure investments for tax efficiency!

1) Investments should be made in the right account. Investments should be smartly allocated between taxable and non-taxable accounts. Hold investments that generate ordinary income and short-term capital gains in tax-deferred retirement accounts. Hold investments that generate dividends and long-term capital gains in taxable accounts.

2) Convert ordinary income to dividends or capital gains. Lower your tax rate on investment income. In a taxable account, convert bond holdings to highly rated dividend-paying investments. And when you sell any investment, make sure you hold it for at least a year and a day to qualify for the lower long-term capital gains rate.

3) Seek Out Qualified Dividends. These dividends receive favorable tax treatment. Taxed at a lower rate (typically 15%) for most taxpayers. For single taxpayers with 2024 income under $47,025, the tax rate is zero. For single taxpayers with incomes over $518,901, the rate is 20%. Taxed similarly to long-term capital gains.

4) Avoid high-turnover mutual funds. Mutual funds tend to be actively-managed, with more trading and shorter holding periods, which produce ordinary income in the form of ordinary dividends and short-term capital gains. Exchange-traded funds tend to be passively-managed, with less trading and more qualified dividends and long-term capital gains.

5) Look at the after-tax return on bonds. Don’t invest for tax-free income at the wrong tax bracket. If you are in a low tax bracket, it may make more sense to receive a higher taxable return. 

6) Harvest capital losses. Sell long-term positions that have produced capital losses, replace them with similar but not identical investments and then use that loss to offset the taxes on realized investment gains from the same year.

As always, if you have any questions please reach out! Call anytime +1 800-808-5009 and ask for David, or send me an email at DGearhart@registax.com!