New Tax Year, New Tax Law
Oh, there are tax changes, you say? Surprise! Yes, and some of them will definitely benefit you as an investor. Take a gander below.
0% Max Tax Rate – Prior to 2008, a 5% tax rate was imposed to what was left over from net long-term capital gains after deducting net short-term capital losses. Effective in the 2008 tax year, however, the tax has been reduced to 0%. This change applies to regular tax and alternative minimum tax (AMT). There are qualifications you must meet, however, so make sure you understand them before filing your taxes.
Video: Ways to Save on Tax Returns
Like-Kind Exchanges – Section 1031 has been modified this year to allow you to use capitals gains from the sale of investment property and business property in exchange for other like investment or business property. You don’t pay any tax on the gain or report any loss on the investment until you actually dispose of your investment. There are strict IRS stipulations on this tax deferment, though, so make sure you educate yourself on the specifics or ask your tax specialist.
Worthless Securities – For the private investor, bonds, stocks and stock rights that totally lost their worth are considered sold on the last day of the applicable tax year. This impacts as to whether your capital loss is short- or long-term, which is determined by the holding period for your specific property.
Taxes and You
Instead of having visions of sugar plums dance in your head, you’re probably experiencing nightmares on Elm Street. It’s tax time, and that’s to be expected, but don’t let it get you down. There are simple considerations you’ll want to keep in mind that may lift your spirits.
Investment Income – Make sure you report your investment income separate from your regular income on your taxes. Unlike regular income, your investment income is not typically subject to regular withholding. It may be subject to backup withholding; however, which ensures that 28% of the amount you were paid is deducted as income tax.
Investment Losses – You can claim up to $3,000 in capital loss for the year 2008, and carryover any excess loss into subsequent years until the loss is satisfied.
Tax-Deferred Investments – These kinds of investments produce tax-free income for the timeframe that your money is invested. These dollars are only taxed when you withdraw the money out of the invested account. Any interest accrued for the duration of the investment is also tax deferred. Want to keep more of your invested dollars? Take advantage of tax-deferred investment like IRA’s, 401Ks and tax-free annuities.
Video: Understanding a 1031 Exchange
How to Keep More of the Money You Invest
In today’s down economy, you’ll want to become more creative as to how you can keep more of that money you make investing, and make those invested dollars work harder for you. Long-term capital gains may be your best bet for keeping more of that money you invest.
Municipal bonds are always a good investment if you can find them, since the investment on them is secure and tax-free. U.S. savings bonds are a better investment now, since Congress created an incentive to purchase them to help fund qualified higher education expenses. You do not have to report interest on the bonds until the bonds are cashed out. Regardless of the pursuits you take to achieve greater control over the money you make investing, you may want to enlist the assistance of a professional tax preparer.