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Tax tactics used by savvy investors

  • One of the most common tax tactics used by savvy investors is tax-loss harvesting. This involves selling investments that have lost value in order to offset gains in other investments and reduce taxable income. By doing so, investors can reduce their tax bill and potentially increase their after-tax returns. It's important to note that there are rules and restrictions around tax-loss harvesting, such as the "wash sale" rule that prohibits buying back the same or substantially identical investment within 30 days of selling it for a loss.

  • Another tax tactic used by savvy investors is investing in tax-advantaged accounts, such as 401(k) plans, IRAs, and HSAs. These accounts allow investors to defer taxes on contributions and earnings until withdrawal, or in some cases, avoid taxes altogether. For example, Roth IRAs allow for tax-free withdrawals in retirement, while HSA funds can be withdrawn tax-free for qualified medical expenses at any time.

  • Some savvy investors also use charitable giving as a tax tactic. By donating appreciated assets, such as stocks or real estate, to a qualified charity, investors can avoid capital gains taxes on the appreciation and receive a tax deduction for the full fair market value of the asset. This can be a powerful way to reduce taxes and support a charitable cause at the same time.

  • Finally, some savvy investors use entity structuring and asset location as tax tactics. By placing different types of investments in different types of accounts or entities, such as LLCs or trusts, investors can optimize their tax efficiency and minimize their overall tax burden. For example, holding high-income assets, such as bonds or rental properties, in tax-deferred accounts can help reduce the impact of taxes on that income. Similarly, holding tax-efficient assets, such as index funds or ETFs, in taxable accounts can help minimize the tax impact of those investments.

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