Chapter 4

Minimizing Your Taxes When Investing

IN THIS CHAPTER

Seeing how investments are taxed

Understanding capital gains and dividend taxation

Employing strategies to reduce investment taxation

Considering tax issues when selling an investment

You must pay attention to tax issues when making investing decisions. Actually, let me rephrase that. Like plenty of other folks, you could ignore or pay half attention to taxes on your investments. Unless you enjoy paying more taxes, however, you should understand and consider tax ramifications when choosing and managing your investments over the years.

Tax considerations alone shouldn’t dictate how and where you invest your money. You should also weigh investment choices, your desire and the necessity to take risk, personal likes and dislikes, and the number of years you plan to hold the investment.

In this chapter, I explain how the different components of investment returns are taxed. I also present proven strategies to minimize your investment taxes and maximize your returns. Finally, I discuss tax considerations when selling an investment.

Understanding Investment Taxes

When you invest outside tax-sheltered retirement accounts, the profits and distributions on your money are subject to taxation. (Distributions are taxed in the year that they are paid out; appreciation is taxed only when you sell an investment at a profit.) So the non-retirement-account investments that make sense for you depend (at least partly) on your tax situation. ...

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