Save Money On Income Taxes With This Quick Tip
Want to save some money on your income taxes? To do so, you’ll need tax deductions. While there are lots of tax deductions out there, some of them aren’t so easy to get. To deduct medical expenses they need to exceed 7.5% of your income. Moving expenses, professional fees and education, even the cost of preparing your taxes are all deductible, but only if those expenses total more than 2% of your income. But, fortunately, there is a potentially large tax deduction available to investors that can help.
Deduct Your Investing Losses
Did you know that you can deduct your losses from investing? Deducting capital losses can provide a huge federal income tax savings. Not only can you use an unlimited amount of losses to offset your capital gains, but you can also deduct up to $3,000 from your regular taxable income. In the 30% tax bracket, that’s a $900 savings on your taxes!
Have more than $3,000 in capital losses this year. That is where the real power of this tax saver comes into play. You can carry forward your undeducted losses into future years. So, if you lost $20,000 last year, you can deduct $3,000 from this year’s income tax return and carry forward $17,000. That means you can deduct another $3,000, and save another $900, each year until you use up the $17,000. Even better, if you have a nice profitable year, you can deduct the full amount against those gains. So, if you make $20,000 next year, you’ll only need to pay capital gains taxes on $3,000!
Hidden Capital Losses
Lots of people know about deducting capital losses, but not as many people know about this tax saving secret. You might be sitting on losses and not even realize it!
Hidden losses come from re-investing dividends. While you are probably very aware of the $25,000 that you invested in XYZ mutual fund, you might not remember that XYZ mutual fund paid $1,000 in dividends this year. If you reinvested those dividends, that is like buying more of the fund. In other words, if your account in XYZ mutual funds is worth $25,000 you might think that you have no losses. Think again.
The $1,000 in reinvested dividends is additional cost. That means that your XYZ fund actually has a $1,000 tax deduction sitting there waiting for you. It could be even higher if you paid commissions because those add to the cost basis as well. So, if you also paid a $300 commission, then you have a $1,300 loss. All you have to do is sell your holding in XYZ fund and then wait 30-days, to avoid wash-sale rules, and then you can reinvest the $25,000. If the price hasn’t moved up too much, then you get to have your investment and deduct it too!