How to know where to invest my money based on taxes

If you want to build wealth you basically have to choose been interest earning assets like bonds and CDs, or between capital assets like stocks and homes. Well, which one is best for taxes? This article will tell you how to find out.

Difficulty: Easy

Instructions

1. Decide how much of your money you want to invest that will pay you interest each year (investment income assets). If you want your investment to put spending money in your pocket then it is best to go with stocks or mutual funds that will pay dividends and capital gains. These choices are better than interest from CDs and bonds since they are taxed at lower levels. What about tax-free bonds? Usually the interest from tax free bonds is so much lower than the earnings from dividends and cap gains as to make them not worth the tax savings. The rule of thumb is to go for tax free bonds only if you make over $150,000 USD per year.

2. Decide how much of your money you want to invest and just let grow for 5-20 years. This is the amount you want to put in long term assets that won't pay you yearly income. These are things like stocks, or real-estate. The advantages of these assets is that you do not pay tax on them until you sell them. If you hold any of them for more than one year, then they are taxed as "long term gains" and not "short term gains". Long term gains are taxed at a lower rate than short term gains, and therefore are a good choice if you do not need income from your investment right away.

3. Know how to offset short term gains with long term gains. It is a good idea to have a mix of long term gains (step2) and short term gains (step1). This is because losses from long term gains (i.e. selling your home for a loss, or selling a stock for a loss) can offset any dividend payments, or cap gain payments, you receive from your investment income assets in step 1. The message is: If you lose money on a stock, don't worry about it, since it can help make your income from your dividends look like less, and thus, save you money on taxes.

4. Decide how much to donate. Donations and other deductibles do matter when it comes to long term and short term capital gains. This is because there can be a 5% tax difference depending on which bracket you fall in. Depending on the year and the law, it is possible to pay no tax on capital gains and dividends if you earn a certain amount. It is important to note that this is not true with interest income. Another tax advantage of choosing dividends and cap gains as an investment income vehicle.

Tips & Warnings

• Be sure to look up the tax code for each year to know how much you will be taxed on your cap gains, depending on dividends. This will tell you how much to donate to get a good deduction on your taxes. This is not as hard as it sounds, just google "irs cap gains tax brackets"