We kick off tax week by focusing on why long-term investing is good for more than share appreciation—it’s good for your fiscal health.
My daughter tried to go to school…She lasted… 15 minutes. The nurse called my wife… who called me.Any hope of going to the office today was thwarted. But along the way to school and back, I wrote this article in my head. Anyone paying taxes “late” with an extension must get their paperwork into the IRS in eight days (October 15)/.If you’re like me, you’ve improved your filing of equity gains and losses in the market in recent years. It takes time to improve your financial health.So, I’ll level with you… especially from what I’ve learned…If you’re not considering tax-efficient investing, you might as well be flushing dollar bills down the toilet.Let me show you why time is your friend…And one strategy you can use to avoid paying Uncle Sam money that isn’t his.
Capital Gains vs. Ordinary Income: The Cage Match
Let’s break this down so that my daughter can understand it. That’s who I had to explain this to in the car. That’s called a “captive audience.”There are two heavyweight contenders in the world of taxes: short-term capital gains and long-term capital gains.In the red corner, we have short-term capital gains – the sucker’s bet.This happens when you hold an asset for a year or less before selling. If you’re a trader, I understand you always want to scalp short-term gains.But if you’re an investor – buying a company – you must understand what’s at stake here.The taxman treats short-term capital gains like your regular income, which means you could pay anywhere from 10% to 37% in taxes. It all depends on your tax rate. And if your gains push you into a higher tax bracket, that money will be taxed at a higher rate.That’s a big chunk of your hard-earned cash!We have long-term capital gains in the blue corner – the smart cookie’s choice.Hold that same asset for just ONE DAY over a year, and suddenly, the IRS treats you like you’re Warren Buffett. We’re talking 0%, 15%, or 20% tax rates. Yes, you read that right – ZERO PERCENT is possible if your income is low enough!Currently, couples earning up to $94,050 annually will pay no capital gain taxes in 2024. The figure jumps to 15% for every dollar over that figure up to $583,750. Over that level, capital gains jump to 20% – still much better than the 37% income rate.For single filers, the 0% threshold is $47,025 in 2024. Let’s do the math here.Say you’re in the 24% tax bracket, and you make a $10,000 profit.If you sell after holding under 12 months, you’re handing over $2,400 to Uncle Sam. But if you just sit on your hands for a few extra months, you might only pay $1,500.That’s $900 in your pocket for basically doing nothing!It’s like finding nearly a grand in your couch cushions, except the couch is your investment account, and the cushions are your patience.Keep one last thing in mind: if you’ve been holding a stock for 12 months or just buying today… remember that these thresholds will increase in 2025 and beyond.
Time in the Market: It’s Like a Financial Pressure Cooker
Now, let’s talk about compound growth.Imagine you’ve got a snowball at the top of a hill. As it rolls down, it picks up more snow, getting bigger and bigger. That’s compound growth, except the snow is money, and the hill is time.If you’re reinvesting in a tax-efficient manner, you’re not losing a chunk to taxes each year. That means more money staying in your account, working for you like a tireless robot. It’s like having a clone of yourself that does nothing but make money 24/7.Let’s break it down with some numbers. Say you start with $10,000 and make a 7% yearly return.After the first year, you’ve got $10,700.Not bad, right?But keep this up for 10 years, and suddenly, you’re looking at $19,672 without spending a single extra penny. Now, imagine if you were losing a chunk of that growth to taxes every year. It’d be like filling a bucket with a hole in the bottom. What’s the best way to reinvest?Well, I’m glad you asked…
Dividend Reinvestment: The Gift That Keeps on Giving (And Giving)
Dividends aren’t just a quarterly pat on the back from companies.They’re your secret weapon for turbocharging your wealth. You might accept the cash if you really need it, but remember that they can be taxed as ordinary income.Instead, you need to think of these dividends as little money seeds that can grow into mighty money trees if you plant them right.When you reinvest dividends, you’re not just letting your money make more money – you’re creating a snowball effect that would make an avalanche jealous.Every dividend reinvested is buying you more shares.More shares mean more dividends next time, which means even more shares after that.It’s a beautiful cycle that can turn a trickle of cash into a raging river of wealth.By “reinvesting dividends,” you’re not getting cash in hand, so you can push off paying taxes.It’s like telling the IRS, “Not today, buddy!”And if you hold those dividend-paying stocks for over 60 days, you might even qualify for the lower long-term capital gains rate on the dividends.
The 12-Month Magic Trick
Holding stocks for over 12 months isn’t just about lower tax rates.First, you must understand that the equity markets have a long-term bias up and to the right over the long term. As I’ve explained time and time again, the financial system continues to expand – more liquidity globally – pushing risk assets higher. But sometimes, you must be cautious, follow rules, and use the market’s tools.First, we’ve got tax-loss harvesting.You can use it to your advantage when the market takes a nosedive (and trust me, it will from time to time).By selling some of your losing stocks, you can offset the gains from your winners. It’s like finding a silver lining in the storm cloud of a market downturn.You can use up to $3,000 of those losses to reduce your ordinary income. That’s right, your stock market boo-boos can lower your overall tax bill.It’s like getting a consolation prize for making a bad investment.Next, let’s discuss qualified dividends. If you hold a stock for more than 60 days around the dividend date, those dividends might qualify for lower tax rates. Lastly, we need to talk about fund selection. Not all funds are created equal.Some mutual funds and ETFs are like hyperactive traders, constantly buying and selling. This can create a tax nightmare for you, as all that trading activity can generate taxable events. Instead, look for funds with low turnover rates. These are the tortoises that win the race in the investing world. Slow and steady doesn’t just win the race – it also keeps the taxman at bay.We’ll talk about some of those funds this week.
Act Now or Regret Later
Every day you’re not optimizing your investments for tax efficiency, you’re leaving money on the table.We’re not talking pocket change here – we’re talking potentially thousands or even tens of thousands of dollars over time.That’s vacation money, new car money, or even retire-early money just slipping through your fingers.So, what are you waiting for? Get your investment strategy in order, start thinking long-term, and tell the IRS to take a hike (legally, of course).We know the best time to plant a tree was 20 years ago. The second best time is now.The same goes for tax-efficient investing. Remember, Rome wasn’t built in a day, and neither is financial literacy.Start small, keep learning, and whatever you do, don’t let analysis paralysis keep you from taking action. Your wallet is counting on you, and so is your future self.More By This Author:A Sneaky Way to Own The Best Energy StocksBeginner’s Luck Or The Best Trade Ever?Dumb Questions Everyone Should Ask…
How To Not Flush Money Down The Toilet
