Navigating the complexity and scope of U.S. tax rules can be difficult for investors. Because the tax code is so intricate, it can create opportunities to save more money, but it can also lead to costly mistakes.
An Ameriprise financial advisor can work alongside you and your tax professional to help position your investment portfolio for greater tax efficiency under the current tax code.
Below are six tax mistakes investors should watch for. Even so, taxes are only one factor to consider when making investment decisions.
1. Overlooking tax-advantaged account opportunities
Accounts such as 401(k)s and Roth IRAs can help lower the taxes you pay on investment earnings. With so many choices available, it can be hard to know which accounts fit your situation and how to use them most effectively.
If you do not use these accounts strategically, you may face a larger tax bill and less favorable results in retirement.
Avoid this mistake: Consider using a tax diversification approach so you can take advantage of the broad range of tax-advantaged accounts available to you.
2. Selling an investment before holding it for a year
Capital gains tax rates depend on how long you have owned an asset and on your income level. Selling before the one-year threshold can lead to a very different tax rate than selling after it, and ignoring that difference can be expensive.
Avoid this mistake: In some situations, it may be worthwhile to hold an investment until you pass the one-year mark so you can benefit from long-term capital gains tax rates.
3. Getting the cost basis wrong
In tax terms, cost basis is the original amount you invested in an asset. It matters because it helps determine how much capital gains tax you will owe when you sell.
Avoid this mistake: When you sell an asset, certain upward or downward adjustments may need to be made to the basis, which can affect your tax bill. Work with an Ameriprise financial advisor and a tax professional to track and determine the correct basis for your holdings.
4. Ignoring loss-harvesting opportunities
Investment losses are never ideal, but investors can sometimes use them to soften the impact of underperforming assets and potentially gain a tax benefit. Known as tax-loss harvesting, this strategy involves selling investments at a loss to offset capital gains taxes from other investments.
Avoid this mistake: Work with an Ameriprise financial advisor and a tax professional to accurately track and report capital losses each year. They can also help you assess possible loss-harvesting opportunities and avoid accidentally triggering the wash sale rules.
5. Missing the chance to harvest gains
It may seem unusual, but in some cases paying more tax now can lead to greater tax savings over time. That is the idea behind tax-gains harvesting: strategically selling appreciated assets to take advantage of favorable tax brackets available to you now. This approach may make sense if:
- You are currently in a lower tax bracket than you expect to be in later.
- Your capital gains tax rate is 0%.
Although tax-gains harvesting can raise your next tax bill, it may still produce bigger long-term savings than waiting until you are subject to higher rates.
Avoid this mistake: Work with an Ameriprise financial advisor and a tax professional to review possible opportunities in your accounts.
6. Forgetting about state tax planning
Federal tax rules often get the most attention, but state tax laws matter too. In many states, investment earnings are taxed at ordinary income rates, which can reduce your returns.
Avoid this mistake: Planning for tax efficiency at both the federal and state levels can help reduce the effect of taxes on your investment results.
Build a more tax-efficient investing strategy
An Ameriprise financial advisor can help incorporate taxes into your broader investing plan and work with your tax professional to identify strategies that may help lower your tax burden.
With guidance from an Ameriprise financial advisor, you may be able to reduce the impact taxes have on your investment returns.
Third-party companies mentioned are not affiliated with Ameriprise Financial, Inc.
This information is provided only as a general source of information and is not a solicitation to buy or sell any securities, accounts or strategies mentioned. It is not intended to serve as the primary basis for investment decisions, nor should it be viewed as a recommendation or advice tailored to the needs of any individual investor. Please seek the advice of a financial advisor regarding your specific financial situation.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult their tax advisor or attorney regarding their particular situation.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Securities offered by Ameriprise Financial Services, LLC. Member FINRA and SIPC.
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