How To Minimize Your Tax Liability As A Small Time Investor
Few of us love paying taxes, and small time investors are not exceptional
. Although we might from time to time be proud of our patriotic duty of paying taxes, we are mainly angry because of the way that we feel that the government is misusing the taxpayer's money. So, if you feel that the pinch of the taxman is quite hard on you as a small-time investor, here are a few tricks to help you reduce the impact:
Deduct Your Qualified Contributions
Many people love to give. Small-time investors use this as an opportunity to build good PR with the local community. But do you know that you can save some money by treating the contributions that you have made to qualified institutions as tax-deductible expenses?
Well, if you make contributions to organizations such as churches, non-profit-making schools, non-profit-making hospitals, and so on, you can deduct these contributions from your income so as to reduce your taxable income and save you a few dollars here and a few dollars there.
Reinvested Dividends
Sometimes, you as an investor may fail to take into account the amount of tax that you pay on reinvested dividends. This might cause your taxable income to be grossly overestimated over time, causing you to lose out on a good opportunity to save some money.
For example, if you start with $10,000 in a mutual fund and earn $1,000 in the first year, your total amount of assets with the fund will be $11,000. If this dividend in the fund is reinvested and the pattern continues, you might end up having $5,000 as reinvested dividends. If you sell your stake in the mutual funds for $19,000, you will be forced to pay tax on the $9,000 since this will be considered as capital gains. However, if you declare that $5,000 is reinvested dividend, you will only pay tax on the remaining $4,000.
Do Not Forget Broker Fees and Commissions
What many people fail to know is that buying and selling stock is not free. There are several costs that are involved, including broker fees and commissions. Unless you are in the mood of giving the government some money, you should always deduct these fees from your income once you earn it.
Although the impact of the broker fees can be minimal - especially for small time investors - the accumulated cost over the years can be high. Again, if you happen to make a lot of transactions in a single day, you can be sure that the figure will go even higher.
Last Word
Apart from these tips, there are many other ways through which investors can reduce their tax liabilities. Whichever method you choose, you must always make sure that your paths are legal. Never be overcome by the temptation to benefit from the oversight of authorities to exploit a loophole and hence evade tax. Apart from it being unethical, the cost of doing this once you are discovered will be too high to be worth it.
by: David de Souza
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