As investors, maximizing returns isn’t just about making wise investment choices; it’s also about strategically managing your tax liabilities. Understanding the various tax breaks available can significantly impact on your overall financial picture. In this article, we’ll explore some of the most valuable tax breaks that can enhance your investment strategy and help you keep more of your hard-earned money.
Qualified Dividends
Qualified dividends are a special class of dividends that meet specific criteria outlined by the Internal Revenue Service (IRS). These dividends are typically paid by U.S. corporations or qualified foreign corporations. To qualify for the favorable tax treatment, the stock on which the dividend is paid must be held for a minimum duration, and the dividend must meet certain IRS requirements.
Tax Advantage: Instead of ordinary income, tax rates are between 0-20% depending on your income.
Tax-Loss Harvesting
Smart investors know the importance of minimizing tax liabilities through strategic moves. Tax-loss harvesting involves selling investments with losses to offset gains in other areas, providing a valuable means of reducing overall tax obligations.
Tax Advantage: Investors can delay paying capital gains tax and even offset part of ordinary income if they have a capital loss for any given year. Losses carry forward into future years while the first $3,000 of annual losses go against ordinary income.
Section 1031 Like-Kind Exchanges
Real estate investors can benefit from Section 1031 like-kind exchanges, allowing them to defer capital gains taxes when selling one property and reinvesting in another of similar kind. This strategy provides a powerful tool for preserving capital and building wealth in the real estate market.
Tax Advantage: Investors can delay capital gains tax while investing in a new property if it meets certain criteria. This is a common strategy for those looking to hold income properties for long periods of time.
Opportunity Zones
For socially conscious investors looking to make a positive impact, Opportunity Zones present an intriguing opportunity. By investing in designated areas, investors can defer and potentially reduce capital gains taxes while contributing to the economic development of distressed communities.
Tax Advantage: If the investment is held for at least 5 years, investors can benefit from a 10% step up in basis. If held for 7 years, this set up increases to 15%.
529 Plans
While primarily designed for education savings, 529 plans offer tax advantages for investors focused on funding educational expenses. Earnings within these accounts grow tax-free, and qualified withdrawals for education-related expenses are not subject to federal income tax.
Tax Advantage: Some states offer deductions for contributions. In all 529 plans, the growth is tax deferred and comes out tax free if used for a qualified education expense. The rules allow leftover 529 balances to be rolled to a Roth IRA with annual contributions limits still applying and a current lifetime max of $35,000.
Presented by the Financial Planning Committee of Lake Street, an SEC Registered Investment Adviser
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.
