5 Techniques To Help You With Taxes For Investors

For large number of investors and even some proficient tax professionals

, wading through the complex rules of the IRS on investment taxes could turn out to be a nightmare.

Not just talking of minor pitfalls, even simple errors on your part could invite severe penalties.

You must remember the below mentioned five most common tax mistakes to avoid any undue hardships:

1. Failing to Offset Gains

When you decide to sell any investment for a profit margin, you are liable for tax on the gains. A way to lower down your tax load is to simultaneously sell some of the loss giving investments. You can then easily use the losses to balance the gains.

2. Miscalculating the Basis of Mutual Funds

Doing calculations of losses or gains from a stock sale is simple. You simply deduct the purchase price from the selling price and the resultant loss or gain is that difference.

This procedure becomes a lot complicated in case of the mutual funds. When doing calculations for mutual funds it's very easy to simply forget the capital and dividends gains which you may have got reinvested in it. The IRS would take these distributions as earnings liable for the tax in that particular year they were done. So you already paid the requisite taxes for them. If you fail to add the distributions in your basis, then you will report a much larger gain than what you actually got from your sale and would pay more tax.

The solution to this problem lies in keeping efficient records and being quick in arranging your distribution and the dividend information.

3. Failing To Use Tax-managed Funds

Many investors usually keep their mutual funds for a long duration. That's the reason they get amazed at getting hit by tax bill for short term gains achieved by their investment. The gains add up because of the sale of stocks held with fund for a lesser duration than one year. These are usually passed on to shareholders and they have to report them in their personal returns.

4. Missing Deadlines

The Roth IRAs, Keogh Plans and traditional IRAs are an excellent ways to increase your investments and do savings for your ensuing retirement.

But sadly, large number of investors fail to make any contributions ahead of due deadlines and thus remain devoid of any benefits which they could avail from the scheme.

The Keogh plans deadline is Dec 31. For the Roth and traditional IRAs it is Apr 15 for submitting your contributions.

5. Putting Investments in the Wrong Accounts

Many investors possess two kinds of investment accounts: traditional and with tax advantage like 401(k) and IRA. Many people though are unaware that holding proper kind of assets in these accounts can help them in saving thousands of dollars of unnecessary taxes every year.

Investments which generates large amount of income which is taxable should be kept in tax advantage accounts, while the investment which pays you dividends or generate long term capital gains should find place in the traditional accounts.

by: Michael C. Miller

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