It’s almost tax season, which poses a few unique tax questions for investors. Figuring out taxes can be confusing at best, and all too often investors end up overpaying because they didn’t take note of the tax breaks available.
The government offers many credits, and you’ll want to get the most out of them this season. As a word of caution, it’s important to carefully research all tax deductions and see if they apply to your situation. Making mistakes on your taxes can come back to haunt you in the end.
To help you get started, here are some common tax deductions that investors often miss.
1. Capital gains
With marginal income tax rates rising, it’s best to look at profits made on the sale of stocks and bonds that have gone more than a year without being sold. These typically have lower tax rates.
Marginal income tax rates can be as much as 39.6%, but preferential rates on stocks with a longer shelf life can only be taxed 32.8% for the highest income tax brackets, 15% for middle income brackets and 0% for those in the 10% and 15% marginal tax brackets. This knowledge can help you save big on your taxes in the future, and it’s the reason why some white-collar citizens pay less in taxes than blue-collar workers.
2. Angel of death tax break
If you’re dealing with stocks that were an inheritance or were once owned by a now deceased person, the angel of death deduction may apply to you. The “angel of death tax break is a U.S. tax provision which steps up the basis of property an heir or will beneficiary receives from a decedent,” according to U.S. legal definitions. In other words, a property or other investment that stands to be inherited is valued at the price valuation on the day of the owner’s death. Whether you’re looking for a better valuation or reduced taxes, this can save you thousands.
3. Valuable losses
As experienced investors know, ordinary losses are much cheaper than capital losses, which cost a lot in taxes. According to a lesser-known rule, if you invest less than $50,000 in a company or venture valued at less than $1 million in assets, you can write off the loss as an ordinary loss and save yourself a debilitating blow.
4. Investment interest
Any interest paid to a stockbroker is usually fully deductible. This interest may be considered margin interest or another type of charge that’s used to obtain a taxable financial investment. Mortgage interest is a popular deduction for property investors who can save thousands every year on this investment.
It’s important to note that not all investment interest is tax deductible. Any consumer interest or interest that has been paid for personal or consumer purposes cannot be claimed on your taxes, and claiming these credits will put you in line for an audit.
5. Passive activity losses
Those who have invested in real estate with the intent to rent could possibly write off as much as $25,000 per year based on things like depreciation and other passive costs that come with owning and renting a property. This applies only if these passive costs exceed the income you’re earning. Basically, if you’re not earning a real profit, the Internal Revenue Service (IRS) will not require you to pay taxes on it.
6. Donations of stock to charity
When you make a donation of stock to charity, it’s considered a noncash charitable contribution. You’ll deduct the market value of the stock, which means if you bought the stock last year and it doubled this year, you can write off the current market value.
7. Miscellaneous fees
Most investors have a variety of miscellaneous expenses that come with making investments. As in business, any expenses that were incurred for the sole purpose of making an investment can be deducted. Some of the more popular tax deductions for investors include:
- Accounting or bookkeeping fees.
- Tax education- or service-related expenses.
- Legal fees.
- Subscription fees for investment advisory.
- Travel costs.
- Investment adviser’s fees.
Remember that you can only deduct the portion of miscellaneous expenses that directly relate to investments. Furthermore, it must exceed 2% of your adjusted gross income. Full details can be found in IRS Publication 529.
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