How to pay less taxes on your investments

Tax-advantaged investments? Those exist, but they aren't the only ways to minimize taxes on your investments.

“In this world, nothing can be said to be certain except death and taxes” - Benjamin Franklin

While we can't escape the latter, we can certainly minimize its impact, especially when it comes to our investments.

While a few specific tax-advantaged investments exist, there are also other ways to reduce taxes in your portfolio.

How are investments taxed?

Investments typically generate income (and trigger taxes) in two ways:

• Capital Gains: When an asset, such as a stock or piece of real estate, appreciates in value, this is known as a capital gain. Usually, capital gains taxes are only due at the time of asset sale.

• Dividends or Cash Income: This is money obtained straight from investments, such as stock dividends or real estate rental income. Typically, these profits are subject to taxes in the year of receipt.

If you’re looking to minimize your investment taxes, you’ll need to explore accounts, strategies and assets that work around these rules.

Here are some investments that can help you minimize taxes (these may vary depending on the country!):

• Utilize Tax-Advantaged Accounts:
  
  Either through individual savings accounts, retirement accounts, pension plans or employer-sponsored plans, you can contribute annually to these accounts to shelter savings and investments from income tax and capital gains tax. You can benefit from tax-free growth on your investments and even benefit from a tax relief of up to 25% in some countries.

• Strategic Investment Planning:

  Other methods to pay less taxes on your investments is buy-and-hold investing strategy, where you can minimize capital gains tax by avoiding frequent trading. Tax-Loss Harvesting, which means to offset capital gains with realized losses to reduce your tax burden. Consider asset location carefully by placing, for example, dividend-paying stocks in tax-advantaged accounts to minimize income tax and take advantage of lower tax rates on long-term capital gains by holding investments for over a year.

• Additional Considerations:

  In some countries, like the UK, you can utilize both spouses' capital gains allowances to minimize tax liability. And you can also benefit from tax-free capital gains in government bonds.

  Remember: Tax laws and regulations can change, so it's crucial to stay informed and consult with a tax professional for the most up-to-date advice. A qualified tax advisor can provide personalized advice based on your specific financial situation and help you implement strategies to minimize your tax liability.

  Nonetheless, by understanding these strategies and seeking expert guidance, you can significantly reduce your tax burden on investments and maximize your long-term wealth.