3 Ways To Reduce Your Tax Burden Using Investments

For many of us, federal and state income taxes are one of our largest annual expenses. But there's no reason to give away so much of your hard-earned money, when investing in your future could reduce your overall tax bill.

Be on the lookout for capital losses. For many investors, gains are a significant part of their total income. Every December, your tax accountant probably tells you to look for losses to offset your capital gains. This is often a wise strategy, since it will reduce the taxes you owe on those gains. But waiting until the end of the year to perform complicated tax maneuvers could trigger suspicion at the IRS. Rather than waiting until December, look for alternative investments to offset gains throughout the year.

Consider long-term performance of assets. Many investors choose to adopt a safer, low-risk investment strategy as retirement looms. But you might be worried about immediate impact of capital gains taxes if you sell high-performing assets. But since some funds see so much turnover, it might be worth it to pay the taxes one time rather than hold onto them. Have your financial planner or tax accountant run the numbers for both scenarios. You might choose pay more taxes during one year, in exchange for lower taxes in future years.

Watch for opportunities. If you've ever talked to someone who retired early, they probably told you that they were always on the lookout for ways to save money. Keep yourself informed by following a few investment blogs, meeting regularly with your financial advisor, and scheduling regular consultations with your accountant. Staying informed on tax savings opportunities will help you to recognize valuable options when they become available to you.
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