11. Gifts and donations of stock and/or assets
Giving away stock that has appreciated is one simple form of donation that comes with a serious tax advantages for investors. The investor, now donor, is not taxed on the capital gains that have accumulated in the donated stock. Further, the entire donation amount — the market value of the donation (to a charitable or religious organization-optional) on the day it is made — is tax deductible.
12. Harvesting tax losses
Investors who buy and sell stocks or mutual funds over time often use losses to offset capital gains come tax time. Many investors might have made large gains from the sale of Boeing, Microsoft, Amazon or other stocks in 2018. If they also sold shares of GE at a loss, for example, the loss can help offset some of those gains. Investors need to be aware of the Wash Sale Rule, which prevents investors from artificially realize losses. Also, if an investor has more capital losses than gains, they are allowed to use up to $3,000 each year to offset ordinary income, and if the loss is even greater, it can be carried forward into future years.
13. Treasury bonds
Most investors just assume that Treasury notes and Treasury bonds are taxable. They are taxable under federal income tax purposes, but states generally do not get to tax those interest payments made by the U.S. Treasury to Joe Public. It is part of the reciprocal tax agreement whereby the IRS does not tax interest made on municipal bonds. Just keep in mind that if you have a realized capital gain by selling a Treasury for more than you paid for it, that part may get taxed by your state if the state levies income and capital gains taxes.
14. Long-term gains versus short-term gains
The IRS does not exactly want the entire nation to be day-trading stocks and assets. The current difference between short-term and long-term gains is defined by one year — anything longer than one year is considered long term. If you sell a stock for a gain 360 days after you bought it, it is a short-term gain and is generally taxed at your income tax bracket. If you sell a stock, mutual fund, or asset 366 days or 10 years after purchasing it, the gain is taxed, usually at a much lower capital gains rate.
15. Opening a side business
While your tax bracket may be determined by your income from your primary work and paychecks, starting a side business comes with certain tax advantages. While the side business will hopefully be successful and add to your income, you are allowed to deduct certain business expenses from you gross income, which may lower your total tax burden. It is important to follow IRS guidelines when it comes to using health care expenses, utility and internet bills, home office costs, and gasoline and/or mileage expenses as your deductions. Entrepreneurs also need to consider that if a business starts losing money year after year, the IRS may view it as a hobby rather than a business entity. And having excessive deductions tied to a side business that continually negate your taxes will probably result in an audit by the IRS and/or your state.