As tax season approaches, many people are focused on filing their tax returns and paying any taxes owed. However, tax season is also a great time to think about investing. By making smart investment decisions during tax season, you can maximize your returns and potentially reduce your tax bill for the following year. In this article, experts like Kavan Choksi will explore tax season investing and provide tips on how to make the most of this opportunity.
Why Tax Season is a Great Time to Invest
Tax season is an excellent time to invest for several reasons. Many people receive tax refunds during this time of year. According to the IRS, the average tax refund in 2021 was $2,884. Investing a portion of your tax refund can help you grow your wealth and achieve your financial goals.
Tax season is a time when many people review their finances and plan for the year ahead. This provides an opportunity to evaluate your investment portfolio and make changes as necessary. By strategically investing during tax season, you can potentially reduce your tax bill for the following year and increase your returns.
Investing in Tax-Advantaged Accounts
One way to maximize your returns during tax season is to invest in tax-advantaged accounts. These are investment accounts that offer tax benefits, such as tax-deferred growth or tax-free withdrawals. Examples of tax-advantaged accounts include individual retirement accounts (IRAs), 401(k)s, and health savings accounts (HSAs).
Contributing to these accounts during tax season can reduce your taxable income for the year and potentially lower your tax bill. For example, if you contribute $6,000 to a traditional IRA, you may be able to deduct that amount from your taxable income, reducing your tax bill for the year.
Investing in Dividend-Paying Stocks
Another strategy for tax season investing is to invest in dividend-paying stocks. Dividends are payments made by a company to its shareholders, typically on a quarterly basis. Investing in dividend-paying stocks can provide a source of income and potentially reduce your tax bill.
Qualified dividends, which are paid by U.S. companies that meet certain requirements, are taxed at a lower rate than ordinary income. For example, in 2021, the maximum tax rate on qualified dividends was 20%, while the maximum tax rate on ordinary income was 37%.
Investing in Tax-Loss Harvesting
Tax-loss harvesting is a strategy that involves selling investments that have declined in value and using the losses to offset capital gains or reduce taxable income. This can be a valuable strategy during tax season, as it can help you lower your tax bill for the following year.
For example, if you sold a stock at a loss of $2,000, you could use that loss to offset capital gains from other investments. If you had $3,000 in capital gains from another investment, you would only pay taxes on the net capital gain of $1,000. Additionally, if your losses exceed your gains, you can use up to $3,000 of those losses to offset ordinary income, such as wages or salary.
Tax season is a great time to invest and potentially reduce your tax bill for the following year. By investing in tax-advantaged accounts, dividend-paying stocks, and using tax-loss harvesting strategies, you can maximize your returns and achieve your financial goals. However, it’s important to remember that investing involves risks, and you should consult with a financial advisor before making any investment decisions. With the right strategy and guidance, tax season can be an excellent opportunity to grow your wealth and secure your financial future.