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Although tax shelters do not exist any more, and saving individual taxes has become harder, there are tax saving strategies that people can use to either defer taxes or minimize deductions.
April 15 is Tax Day in the United States and it is the deadline for filing individual tax returns. These taxes are on the income we earn and money made from stock trading is no exception. In order to reduce your tax liabilities, it is important to understand the relationship between taxes and your investment portfolio. You must keep a record of everything and the best way to ease your burden is to take help from an accountant or a tax advisor.
The IRS levies taxes only on realized gains; but you can offset realized capital gains by realized capital losses. If you realized capital losses are more than the gains, the amount can be used toward reduction of income, up to $3,000 each year.
If you take no action, unrealized capital gains and losses are carried over to the next year. If prices of your stocks are not expected to rise or fall significantly, you can figure out which gains and losses you should realize to reduce your taxes.
The cost basis is the original cost of the share along with adjustments like commission that is paid. If you make a profit in the transaction, it will be deemed as capital gains. However, if you incur a loss, it will be considered as a capital loss. Depending on how long you have held the stock or security, capital gains will be taxed at a lower rate than your ordinary income. If you hold the stock for more than a year, and you have a gain, it is termed as long-term capital gains. Long-term capital gains are taxed at 15 percent while ordinary income is taxed at 35 percent. So, it makes sense to hold on to a stock for a longer period of time and there is enough evidence to support that the longer you hold a stock, the higher are the chances of the share price increasing.
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