Another area where you can lower your taxable income is with tax loss harvesting. This means that once a year, you should look over your portfolio and take advantage of any losses.
The tax code allows you to offset short-term gains with short-term losses, and long-term gains against long-term losses.
Once you do this, then you can use either type of loss for either type of gain. And finally, if you have more losses than gains, you can write off up to $3,000 worth of losses annually against your ordinary income.
#4. Be Smart About Rebalancing
While rebalancing does help to increase your gains over time, it isn’t the easiest to do when taking into account taxable income. As a result, there is an easy solution to rebalance and be tax conscious at the same time.
To rebalance in a smart way, direct future money to the assets that need additional capital. Here is how this would work.
Let’s say you have a 60% stock and 40% bond allocation. You notice that it is currently a 70% stock, 30% bond allocation. Instead of selling 10% worth of your stocks and realizing a potential gain, you could simply put any money you were planning to invest into the bonds. You would continue to do this until your allocation got back to the 60% stock and 40% bond allocation you want.
At the end of the day, being aware of taxable income when it pertains to your investments is a big deal. Taxes eat away at your returns and income and as a result, leaving you with less money.
Take a little bit of time to be more tax conscious and work to keep the taxable income your investments produce as low as possible.
This article was republished with permission from Modest Money.