Written by How Taxes Affect Investment Gains
- Capital Gains Tax: When you sell an investment for a profit, you may owe capital gains tax. The rate depends on how long you held the asset.
- Short-Term vs. Long-Term Capital Gains: Investments held for less than one year are subject to short-term capital gains tax, which is typically higher than long-term capital gains tax.
- Dividend Tax: Dividends are typically taxed as income, though qualified dividends may be taxed at a lower rate.
Tax-Advantaged Accounts
- IRAs and 401(k)s: Tax-deferred accounts allow you to defer taxes on your investment gains until withdrawal, potentially reducing your current tax burden.
- Roth IRAs: With Roth IRAs, contributions are made with after-tax money, but qualified withdrawals are tax-free.
Strategies for Minimizing Taxes on Investments
- Tax-Loss Harvesting: Sell losing investments to offset gains in other areas, thus reducing your overall taxable income.
- Hold Investments Long-Term: By holding investments for more than a year, you can reduce the rate at which capital gains are taxed.
- Invest in Tax-Exempt Bonds: Municipal bonds are often tax-exempt at the federal level, providing tax advantages for investors in higher tax brackets.
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