Overview
Tax management is a critical component of any investment strategy. At the end of the day, its not how well your investments perform, its how much you get to keep that matters.
Types of Investment Income
For tax purposes, the IRS classifies income from investments into one of the three following categories.
- Dividend Income - income paid by the company out to its shareholders. Taxes on dividends represent a kind of double taxation. The rate on dividends changes as the tax law evolves.
- Short Capital Gains/Losses - profits or losses realized from selling stock after holding for only a short time, currently set at one year by law.
- Long Term Capital Gains/Losses - gains and losses from selling stock after holding it for more than a year.
Tax Strategies
- Avoid Dividend Income
- Accelerate the recognition of losses, delay the recognition of gains. In particular, if a winning asset can be held longer than a year, the manager should do so.