Tax strategy can be an important part of building your wealth (just ask our new President). For example, retirement accounts can help you shelter a large and growing amount of your profits for you to use in the future.
In this post I also outlined why I’m trying to hold an investment for over a year, mostly due to tax implications. Another tactic that you can use, especially as we get close to the end of the year, is to defer having to pay your taxes.
What this means is that if you can avoid claiming income or profits for 30 more days, then you can potentially defer the relevant taxable outlay until next year.
You still have to pay your taxes eventually, but you get a zero interest loan good for a year!
A low-interest loan is valuable — a zero interest loan is even better!
Let’s use Mr. CentsAndSense.com and Mr. Regular Joe as examples (it’s been a while since we’ve talked about them hasn’t it?). Mr. Regular Joe sells an investment in December and gets a tax bill for $2,000. He then pays his tax bill as usual. Yep, that’s all folks.
Mr. CentsAndSense.com however, waits until after January 1, 2017 to sell.
He uses the $2,000 that he would’ve paid in taxes to invest, and by investing somehow earns a 100% return. Mr. CentsAndSense.com still pays his original $2,000 tax bill when it’s due, but now has an extra $2,000 in his pocket whereas Mr. Regular Joe doesn’t.
Even if he doesn’t double his investment, (because come on, that’s ridiculous), but makes 10% that’s an extra $200 in his pocket.
Nothing really changes, except when the taxes are actually paid, yet Mr. CentsAndSense.com has extra $$ to spend/invest/burn that Mr. Regular Joe doesn’t. How cool is that?
Edge case: if you expect to earn a substantial amount of profit, you may have to pay “estimated taxes” quarterly. If this is a potential concern, I recommend talking to a tax advisor on your options and requirements.
What other tax tips do you use?