Death and Taxes – Tax Avoidance Strategies

Benjamin Franklin famously uttered, “Nothing can be said to be except death and taxes.”

However, taxes are one of those things that a prudent investor wants to minimize. On the other hand, you only have to pay taxes IF you make gains, so in the head of the rational investor, they are happy to make gains, and pay taxes. I have put together 5 of my favorite tax minimization techniques.


1. Hold On

Capital Gains are paid on treated differently depending on how long you have held your positions. Any position that you have held for over one year is treated as a Long Term Capital Gain, and pays a lower rate than your income tax rate. Any position that is sold prior to holding it a year, will be taxed at your highest marginal rates. Usually, long term capital gains are about half the rate as short term gains. So holding that position for an extra month may well be worth it! Here is a link to a great explanation of the tax treatment on capital gains with the 2018 tax rates.


2. Hold On (Part 2)

Defer your taxes  by holding positions into the new year! Would you rather pay this April or next April? Me, I always want to hold off giving the government my money. On the other hand, if I am going to take some losses, that would be better sooner!


3. Risk On

A typical investor has a brokerage account, an IRA and maybe a 401k. The standard ploy is to take cautious long term positions in your retirement accounts, and more actively trade your  brokerage account. I would argue that if you can be disciplined it would make more sense to trade within your IRA (where you don’t pay taxes) and take longer term positions in the brokerage account. The caveat is that you do not want to over-risk your long term retirement portfolio – so be sensible here!


4. Better Late

Speaking of IRA’s, you may think that you have missed the opportunity to make a contribution to your IRA for 2017. You would be wrong. You can contribute all the way up to April 17th, 2018. Obviously make sure you are qualified to deduct an IRA contribution (high income, and 401ks can get in the way), but tax free accumulation is always a good thing. This article helps you determine whether you can take an IRA tax deduction.


5. Harvest

Capital Losses can offset any gains that you have. So even though you feel defeated when you liquidate a losing position, you should feel great that this loss will reduce taxes on your other gains!

In addition to his famous death and taxes quote, Benjamin Franklin also said, “A penny saved is a penny earned.” So hopefully there are a few ideas among the five above that will save some pennies.

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