Due to the uncertain economic outlook in the current market and rising inflation rates, an increasing number of investors are looking for ways to improve the tax efficiency of their holdings. As pointed out by Kavan Choksi, while some opt for tax-advantaged investment accounts like Roth IRAs or health savings accounts, others choose to put their money in tax-exempt funds. On the whole, there are many investment vehicles one can use to save on taxes.
Kavan Choksi shares insights on saving tax on investments
As a person invests their money, their profits shall be subject to taxes. The tax rate a person has to pay on their investment income would rely on their tax bracket, as well as the type of investment.
Here are a few distinctive types of taxes one may owe on their investments:
- Taxes on dividends: Dividends imply to the payments made by a company to its distinctive shareholders. If a person owns stock in a company that pays dividends, they would be responsible for paying taxes on those dividends.
- Taxes on interest: In case an investment earns interest, the investor shall owe money on that growth at ordinary tax rates. The tax rate would depend on the tax bracket of the investor.
- Taxes on capital gains: Such taxes are applied when an investor sells off an investment for more than what they had initially paid for it. Short term capital gains are taxed at the regular income tax rate. The assets held for more than a year are ideally taxed at a lower rate of 15% to 28, based on the investment type and the income of the investor.
In the opinion of Kavan Choksi, there are a number of investment instruments available in the market that can help investors to save on taxes, municipal bonds being among the most popular ones. These debt securities are issued by local or state government for financing various public projects like hospitals schools, and roads. Such fixed-income investments pay a very specific sum of interest and return the principal amount to the holder on the relevant maturity date. The interest earned by an investor from municipal bonds is generally exempt from federal income tax. In case the investor lives in the state where the bond was issued, they might also be exempt from state and local taxes.
For people who plan to diversify their investments, certain exchange-traded funds and mutual funds or ETFs, would be an ideal choice for enjoying tax advantages. Such types of investments basically pool money from multiple investors, and subsequently invest it in a variety of securities. Tax-exempt mutual funds and ETFs commonly invest in municipal bonds, as well as other securities that tend to be exempt from federal income taxes. Such investment vehicles are ideal for high-income earners who are investing outside of an IRA or traditional retirement plan. For people whose employer offers a health savings account, or HSA, it can also prove to be a powerful investment tool that offers tax advantages. If a person uses their HSA dollars for eligible health care expenses, then their withdrawals shall be tax-free.