Investment Tax Planning

When you have investments you want to take advantage of all the tax rules you can so as to maximize your gains. This usually means combining several different types of investments that have different tax advantages and disadvantages, so as to balance each other out. This process is referred to as investment tax planning.

How Investment Tax Planning WorksInvestment Tax Planning

Each type of investment is going to have a different type of taxation attached to it. Make sure that your investment advisor thoroughly understands tax laws so that their choices do not have negative ramifications on your tax return. When it boils down, your main goal with investment tax planning should be to preserve your investments now so that you can have as much growth as possible.

How Investments are Taxed

Understanding the different kinds of investment taxation is vital to having a successful investment strategy. We will give a brief overview of the main types of investment taxation.

  • Capital Gains and Losses

This type of taxation occurs when you sell or exchange certain types of investments. You will not have to pay if your investment simply increases in value, you only have to pay if you dispose of the property. To find what your capital gain would be you subtract the sale price from your cost basis (or the amount you originally paid) and the cost of any improvements. To calculate capital loss you subtract your cost basis from the sale price.

You can offset your gains with any losses that you take. If your losses are greater than your gains you can use them to offset up to $3,000 of your income. You can also choose to roll over remaining losses to the next tax year.

If you still have capital gains after taking out any losses, you will have to pay taxes on them. The amount you will have to pay will be indicative on the length of time that you owed the investment. If you owned it for less than a year you will have to pay what are called short-term capital gains. These rates will be the same as the ordinary tax rates that you pay. If you have had the investment for over a year you will pay long-term capital gains. There are usually much lower than what you would pay for short-term.

Having an advisor that understands tax consequences comes in handy in situations like these because they will make the best choices regarding selling and holding investments so that their choices to do have an adverse effect when April comes around.

  • Qualified Dividends

These are dividends that you receive from a domestic or qualified foreign corporation. These are taxed at the same rates as long-term capital gains are. You may receive them one of two ways: directly from the corporation; or through stock mutual funds, other regulated investment companies, partnerships, or REITS. Please note that distributions from tax-deferred accounts such as IRAs or annuities are not considered qualified dividends, even if the money in these accounts are invested in stocks.

  • Ordinary (Investment) Income

This term refers to any investment income that you receive that is not capital gains, qualified dividends, or tax exempt. This type of investment income is taxed at ordinary rates and may come from such investments as bonds or bond mutual funds, as well as any interest that they generate.

  • Investment Expenses

This is the interest that you earn on any money you borrowed to buy investment property. You can use this expense to offset investment income and you can also carry if forward to the following tax years. Other expenses, such as commissions, are written off on Schedule A of your tax return as itemized deductions.

  • Passive Income and Losses

You can incur passive income and losses when you have an investment that you are not an active participant in. This would include, but is not limited to, rental real estate and limited partnerships. Passive losses can offset passive gains, but they cannot offset capital gains. They also can be carried forward to the following tax years.

$99 Tax Preparation

  • Tax-Exempt Income

It is very uncommon to have any type of investment that is going to have tax exempt income. However, investments such as municipal bonds are considered tax exempt.

  • Deferred Income

Tax-Deferred Income investments grow in a sheltered setting and are not taxed until they are withdrawn. A qualified IRA would fall under this type of taxation. These can be of great benefit since most people do not draw out of them until they are retired and in a lower tax bracket. You are taxed at the tax bracket you are in at the time of withdrawal, not at the time of earning.


Taxes are extremely complicated to being with, but they get even more complicated when investments are added into the mix. Make your future more certain by partnering with an investment advisor that has extensive tax knowledge. To learn more visit