These days, many Americans take part in the stock market and other types of investment in a number of different ways, and the fact of the matter is that no one approaches these efforts the same way. As such, it might be wise for most to take a careful look at the ways in which their investments will impact their tax liabilities at the end of every year, and see what they can do to reduce them going forward.
That often includes just knowing what will and won't trigger higher tax rates, according to a report from Kiplinger's Personal Finance. For example, capital gains tax rates are on the rise, and as such it might be wise for those who already have high incomes for the year to wait a little while before tapping them, unless they can find significant deductions to take.
In addition, those investors who choose to sell securities that they've owned for less than a year will typically be taxed on the proceeds of that sale at the normal income rate for their income brackets, the report said. Therefore, many experts would recommend holding onto these potentially high-gain securities for at least that one-year period so as to avoid significantly increased taxation.
What else should they know?
When dealing with stocks that are bundled as part of a 401(k), it's wise for investors to keep in mind that withdrawals from these accounts are viewed as ordinary income by the Internal Revenue Service, the report said. However, sometimes people are given the option to take lump-sum distributions, and in these cases, they will only be taxed at the ordinary rate for the price at which the shares in question were purchased, and only pay capital gains on any additional income that results.
Of course, this is all fairly complicated even for the most seasoned of investors to understand, and for that reason it's always a good idea for consumers to work with reputable, experienced tax professionals throughout the year. This can help to reduce some of the headaches that may crop up during filing season for those who don't work with such experts year-round.
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