Corporate Accounting 101: How To Maximize Profits After Taxes
Many people consider investing the most lucrative option a person can have. After all, it's possible to earn thousands in a single trade, be it from bonds, mutual funds, and others. But it's not as easy as people think. For one, investors have to pay a commission for each trade, which can chip away at their profits. Even more so for retail investors since the commission is higher.
Secondly, profit isn't guaranteed, and there are times when you'll have to cut your losses. But most importantly, whenever you make a profit, you have to pay taxes proportional to the amount you've earned. Put simply, your actual profit would be much less than you think.
Of course, you can't skip paying taxes or the commission altogether, as that would be illegal. You can, however, maximize your profits by simply reducing the taxes you owe, and here's how.
1. Choose Long-Term Investments Over Short-Term
When you invest in an asset and sell it at a higher price, the price difference is called capital gains. Your capital gain is subject to taxes, and the rate would vary according to how long you owned the asset before selling it. There are two categories of tax rate:
- Short-term: If you only had the asset for less than one year, the tax rate can go up to 37% percent of your capital gains, which is absurdly high and can take away a chunk of your supposed profit.
- Long-term: If you had the asset for more than a year, the tax rate could go from 0% to 20%, which is a lot more favorable than the short-term tax rate.
Naturally, if you want to maximize your profits after taxes, you need to focus on long-term investments. By doing so, you can potentially reduce your taxes to half. But if that's too much work for you, then perhaps seeking help from an expert would be the ideal course of action. On that note, you might want to consider Hart Accounting Services.
2. Capitalize On Your Losses
As previously said, you're bound to have some losses when investing. However, the beauty of investing is that you can capitalize even on your losses. This is mainly because when you buy an asset and sell it at a lower price, the difference can be used to reduce your taxable capital gains.
For example, if you lost USD 9,000 from an investment you made in 2018, you can deduct $9,000 from your future taxable capital gains. So, if you earned USD 12,000 on investment in 2021, you can reduce the taxable capital gains to USD 3,000, which would effectively maximize your profits. You may also deduct only a portion of that USD 9,000 every year.
Since the maximum is USD 3,000 per year, you can reduce USD 3,000 on your taxable capital gains every year for the next three years.
3. Consider Investing In Municipal Bonds
There are different types of investments. Bonds, hedge funds, and equity are a few examples. Each of them works differently from one another. One particular investment that may catch your attention is municipal bonds—one of the very few securities exempt from taxes.
With that said, if you want to maximize profits, consider investing in municipal bonds. But, of course, this only applies if you think the investment would be profitable.
4. Put Your Money Into A Retirement Account
One of the main reasons investing is seen in high regard by many people is that you don't really need to do much other than analyze the financial market. There's also no need to spend your capital on various expenses.
The only expense you need to worry about is taxes. But with the right strategy, you won't even have to worry about it until you retire. And you can do so by keeping your portfolio in retirement or pension accounts, like 401(k) or IRA (Individual Retirement Account) plans.
For your reference, these accounts are tax-deferred, meaning you don't have to pay the taxes you owe immediately. Instead, you only have to pay them once you start withdrawing.
So, if you only start withdrawing your gains once you retire, the tax should be a lot less than before, especially if you're old enough to qualify for tax deductions. But, of course, this is only viable if you're willing to wait. Otherwise, you might want to stick to the previous tips.
Wrapping Up
Investing might be lucrative, but it's not as easy as people think. There are many things to consider, and taxes are among the most problematic of the bunch. This is especially true for retail investors since they're not eligible for tax deductions and exceptions. However, reducing their taxes can go a long way in maiming their profits from each investment.