Tax Tips for the Individual Investor

Tax Tips for the Individual Investor

How you invest and where you invest depends greatly on your situation. However, some common principles or tax tips apply to almost every investor and can help you save money. In this article, we will talk about some effective tax tips and explain their benefits so that you can make smart decisions next time when you invest.


Are you one of those investors who end up paying a huge capital gain tax when selling your mutual fund shares because of overlooking dividends that were reinvested automatically in the fund? Reinvested dividends can effectively reduce your taxable gain by increasing investment in a fund.

For instance, say you originally invested $5,000 in a mutual fund and had $1000 in reinvested dividends in additional shares over the period. If you sold the stake for $7,500, your taxable gains would be $1,500. However, most people forget to deduct the reinvested dividend amount and pay a higher tax.

If you overlook this advantage now, it will cost you in the long run. When you miss out on saving tax today, you are losing the compounded potential growth of those extra dollars. Maintain a proper record of dividends reinvested, and always review tax rules applicable to every tax season. 


When the stock market performs badly, investors turn to different places for investing their money. You may find a safe place to invest in Bonds- which provide interest income to boot. The best part about bonds is: that you may not need to pay tax on the interest you receive.

Why so? You bought the bond in-between interest payments; you don’t have to pay the tax on accrued interest before purchasing. You will be able to deduct the accrued amount from the entire amount.

Some investors also prefer government debt for the short term and safe harbor of their money. Municipal bonds are a good option for retail investors to take tax advantage of. These bonds are issued by local municipalities or state governments to finance a project like the construction of a hospital or school or to meet other operating expenses.


People who like to invest in small business ventures or self-employed investors have many operating expenses that should be written off. Like if you are going on a business trip and you need accommodation, the cost of meals and lodging can be written off as a business expense. If you consciously include these personal expenses can help you save a lot of money from tax.

Homeowners who sold their house during a year, reporting the capital gain on the sale of a house is done on the cost basis of purchase. If you did some renovation in your house, you could include this cost in the adjusted cost, thus reducing your overall capital gain.

Tax-Deferred Programs

Whenever you trade stock, your money is vulnerable to capital gains taxes. If you purchase a tax-deferred account, you can save a lot of money. If you use tax-deferred accounts, you will not be taxed until n unless you withdraw the money. A tax-deferred account also provides the flexibility benefit because investors are concerned about the tax implications when making trade decisions. When you the funds in tax-deferred accounts, you have the freedom to close out as early as possible if you experience a strong appreciation in prices. 

picture of a calculator for income tax calculation

Match Your Profits/Losses

It is good to match the sale of profitable and loss-incurring investments in the same ear. You can use capital losses against capital gains, and short-term losses can also be subtracted from short-term gains. In a case of a bad year, you can carry the $3000 of the loss amount to the future years. This is counter-intuitive but works well.

The paper gains and losses are not counted because there is no guarantee that the investment will or not change the value before closing out. Capital loss and gains are only applicable when the tax return is realized.

Add Broker Fees to Stock Costs

Busying stock does not come for free. You have to pay commission charges and transfer fees if you are changing brokers. When determining the overall cost basis, you can add all such expenses to the stock costs.

These costs are written off because these are direct expenses incurred on growing your money. Transaction costs and brokerage fees represent the money coming directly from your pocket as the incurred expenses for undertaking the investments.

Modern discount brokerage charges relatively low fees, but there is no reason to avoid claiming every possible expense when filing taxes.

When added over the year, small brokerage fees can make more than $100 if you are an active trader.

glass jar filled with dollar bills

Hold on to Your Stocks

The buy-and-Hold strategy is also a good trick. Short-term capital gains earned within a year will be taxed just like normal income, and this can be higher than the rate of the capital gain that applies to long-term gains. Many investors plan to invest in equity markets for years and move from one stock to another every passing year. They still keep the money active in the market for a particular period. If you are one such investor, take a moment to think about the tax advantage on the buy-and-hold in the long term to save a lot of money.


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