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The Best Tax Saving Strategies for Investors

17 February 2016 in Investing Insights

Key Takeaways

  • Are you an investor who wants to minimize taxes? There are many ways to reduce your tax burden such as contributing to tax-favored accounts like 401(k)s, investing in tax-free bonds, and harnessing tax-loss harvesting.
  • Avoid paying too much in capital gains taxes by remembering to include brokerage fees, commissions, and any reinvested dividends into your cost basis when you report liquidated investments on your tax returns.
  • Other ways to save on taxes include making eligible donations to charities, maximizing write-offs such as mortgage interest and business expenses, and relocating to a tax-friendly state such as Florida before or during retirement.

The less you pay in taxes each year, the more money you have at your disposal to invest and grow for years to come. Here are several tax savings strategies for savvy investors to consider.

Maximize Tax-Favored Accounts. Setting a goal to maximize your contributions to tax-advantaged accounts each year is a great habit to pick up. There are many different types of accounts you can fund and benefit from tax-deferred growth such as traditional IRAs and 401(k)s. Health savings accounts (HSAs) and 529 plans also offer tax benefits for medical expenses and college costs respectively.

Be Both Punctual And Accurate. Most people hate paying taxes. What’s worse is paying penalties and interest because you filed late or made a careless error that doesn’t get caught right away. While the IRS certainly understands that mistakes happen and works with filers to resolve mistakes, they have the authority to collect interest, penalties and fees for late payments. Save yourself a lot of hassle and review all of your tax forms before you file.

Explore Tax-Free Bonds. Is the stock market making you feel a bit uneasy? If you’re looking for ways to diversify your investment allocations into bonds, consider bonds that are tax-exempt. Municipal bonds (munis) are a form of debt issued by states, cities or other local government entities. They are typically exempt from state taxes, when purchased by residents, as well as federal taxes. However, some income may be subject to alternative minimum tax (AMT).

Harness Tax-Loss Harvesting. One tax-reduction strategy that many investors take advantage of is known as tax-loss harvesting. It involves selling positions in your portfolio that have lost value as a means to reduce capital gains taxes on profitable investments you’ve sold in the same year. Currently, $3,000 is the maximum limit you can claim in stock losses per year. However, any remaining losses can be carried forward to future years until the entire loss is claimed.1

Source: Fidelity

Don’t Forget To Adjust Your Cost Basis For Reinvested Dividends. The last thing any investor wants to do is pay more capital gains taxes than they need to on their hard-earned investment performance. When you liquidate shares, be careful you don’t forget to include any reinvested dividends into your cost basis when you file your taxes. Otherwise, your cost basis would be too low and you could be taxed on larger gains than what actually took place.

Utilize Eligible Tax Write-Offs. If you’re self-employed, you are well aware of the importance of tracking operating expenses that can be used to lower your tax liability. As an investor, you may be eligible for similar write-offs such as new computer equipment used to trade and manage your investments or business travel. It’s important to track how much of your expenses were used for personal reasons versus business, however, since not all of your expenses may be eligible for a tax deduction.

In addition to reducing the amount of investment fees you pay across all of your accounts, keep track of the fees you do pay. Those direct expenses should be added to the amount you paid for your investments when calculating your cost basis, helping reduce your tax liability upon liquidation.

Bump Up Your Charitable Giving. As you know, charitable donations to 501(c)(3) entities can provide a nice tax deduction when it comes time to file your returns. There’s no shortage of groups to give to either. With over 1.5 million charitable organizations in the U.S. you are sure to find causes that you care about.2

Just how generous are your fellow Americans? In 2014, $358.38 billion was donated to U.S. charities. That’s a 7.1 percent increase from 2013. Other interesting facts include 2.1 percent of U.S. GDP in 2014 came from charitable giving, and donations have historically risen about one-third as fast as the stock market.

Other benefits of charitable giving in addition to eligible tax deductions include personal satisfaction, helping others with basic needs, improving your community, and also potentially accessing matching gifts from your employer.

Bump Up Your Charitable Giving.
Source: NPT

Consider Relocating To A Tax-Friendly State. There are 13 states that tax Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia.3 If you currently reside in one of these states, moving before you start to collect Social Security could save you a lot of money in your retirement years.

It takes time and planning to pack up and move, especially if you are moving from one state to another. But it is worth considering relocating to a tax-friendly state if you have the flexibility and currently reside in one of the highest taxed states such as California, New York, New Jersey, or Connecticut. Popular tax-advantageous states include Florida, Arizona, Nevada, and Georgia.4

Consider Relocating To A Tax-Friendly State
Source: Kiplinger

Actively Adjust Your Withholding As Your Life Situation Changes. Remember when you first started your job you had to fill out and submit a W-4 form for tax-withholding purposes? If your HR department hasn’t been reminding you to update it each year, it’s a good idea to review what you have on file, especially if you’ve moved or had any notable life changes.

For example, if your marital status or number of dependents has changed, updating your withholding might help you better manage your money during the year. Some people choose to raise or lower their withholding depending on their estimated tax liability and how disciplined they are with cash management. Be careful not to withhold too much during the year because you could lose out on the earnings potential of money that’s temporarily tied up with Uncle Sam.

If you’re unsure what your optimal withholding is, check with a tax advisor. They can provide guidance to help you avoid paying any penalties or fees when you file your return due to underpaying during the year.

Become A Property Owner As Soon As You Can Afford To. If you have a mortgage, eligible interest payments can reduce your taxable income each year until your mortgage is paid off. Once you own a property, be sure to keep good records of any renovations and improvements you make. Typically, if the work done has a useful life longer than one year, the money you spent can be included in your adjusted cost basis when it comes time to sell. A higher cost basis can help reduce your capital gains on the sale price.

Save And Invest For Your Retirement Today

Paying taxes is unavoidable, but you can utilize different strategies to reduce your tax liability each year. The earlier you can start saving for retirement, the greater your chances are for a better financial future.

Motif Investing offers Traditional IRA, Roth IRA and Rollover IRA retirement accounts with no fees. Ready to get started? Click here to learn more and apply now.


Fixed income investments are subject to various unique risks, including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Fixed income securities are subject to increased loss of principal during periods of rising interest rates.

Motif Investing, Inc. does not provide tax or legal advice, you should consult with your personal tax and financial advisor before making tax-related investment decisions.

  1. Carl
    23 Feb at 7:56 am

    I feel fortunate to be a property owner and to be able to deduct my mortgage interest. I was just speaking to a woman in her 60s who had relocated in hopes to become a property owner but has been outbid repeatedly and now pretty much out-priced in her area.

  2. Jeff
    1 Mar at 11:45 pm

    Of the tax friendliest states, I think I’d pick Nevada or Arizona if I decided to move. The older I get the more I want to save on my tax bill so I have more for my retirement.