There are at least two experiences most of us don't look forward to. The first: going to the dentist. The second: preparing your taxes. While we can't pay someone to go to the dentist for us, we can pay someone to do our taxes and that is what most of us choose to do.
Here's the problem. Most tax preparers follow a cookie cutter approach to preparing your taxes. They incorrectly assume that one size fits all and seek to be paid for volume rather than quality.
If you want to maximize your tax deductions this year and beyond, you'll need to know the following five insider secrets that are frequently overlooked by most investors and accountants.
1) Use Dividends to Pay Taxes
Instead of investing in Mutual Funds, consider investing directly in Dow stocks. Dow stocks are the most conservative investments around, the Steady Eddies of the U.S. market. They have long track records of generating profits and rising stock prices. They also have a history of raising their dividend over time.
As an example, Coke Cola (KO) has raised its dividend from $.11 per share to $.28 per share over the last ten years. Dividends are your share of a company's profit paid directly to shares holders every 13 weeks. Your dividends can even be mailed to your home and are spendable cash.
Yes, these dividends are taxable but they put cash in your pocket for things like home repair and vacations. Here's the best part. You can even use your dividend income to pay your tax bill if you owe taxes at the end of the year. For the past 25 years many of the world's wealthiest investors have paid their annual tax bill with first quarter dividend income.
2) Use Online Brokerage Fees to Your Advantage
You pay a commission to your online broker every time you buy or sell a stock online. That commission can range from $5.99 to $39.95 depending on the broker that you use. The commissions that you pay are also tax deductible. However, if you don't tell your tax preparer, you could be losing thousands of dollars per year in deductions.
3) Margin Interest
Margin is a line of credit extended to you by your online broker for trading purposes. If you choose to use that line of credit and borrow your broker's money to trade stocks, your broker will charge you interest on any outstanding balance. Margin interest should be added up at the end of the year, as it is also tax deductible.
4) Short Term vs. Long Term Capital Gains on Stocks
When you buy and sell a stock for a profit, you will owe capital gains tax. Capital gains are higher when you buy and sell the same stock within a year. However, when you hold a stock for longer than one year and then sell it, the IRS will tax you at a lower rate. The good news is that if you owe capital gains tax, you must have had some capital gains!
5) Take Advantage of Losses
This is really important. Understanding how to handle losses is where most of my Wealthy Investor Program students how learn to be great stock market traders and tax strategists. If you own a stock that has declined in value over the last 52 weeks and sell it at a loss you can reap the tax benefits.
Here's how it works. Let's say you purchased shares of XYZ stock at $50 per share and they decline in value to $40 per share. If you then sell those shares for a loss of $10 per share, that loss is tax deductible.
Currently, the IRS will allow you to deduct $3,000 per year of losses. This deduction lowers the tax bill that you owe at the end of the year. However, if you have a $9,000 loss for the year, you can then carry your loss forward to the next calendar year. In this case you would have a $3,000 deduction for the next two years against future stock gains.
In the stock market losses are not a bad thing. You just have to know how to use them to your advantage. That's part of being an educated investor and something that I teach in my Wealthy Investor Program.
So what's the moral of the story? Getting a financial education can pay off big time. It's a topic making new daily and was just this week discussed on the CBS Early Show with Charlie Rose.
Trading stocks online can be profitable as well as produce tax benefits that your Mutual Fund cannot. It is your job to learn how to be a self-directed investor so that you can invest in the stock market, trade stocks on your own, and realize all of these benefits along with the wealthy.