Five Simple Ways Not to Spend Too Much on Taxes
by Byrne Hobart
We hate losing money about twice as much as we like making it. Seriously. Several studies show that if you unexpectedly lose $1, you won’t be happy making just $1 back — you need $2 to reach an even keel. That’s one reason market volatility makes folks so nervous; when losses hurt more than gains help, a market that bounces around a particular level still makes people unhappy.
Here are a few ways you can ease the pain:
- If you’re going to own stocks, own them forever. It’s not hard. Think about a company’s product. Ask yourself if people will still use it in fifty years. If yes, and the stock is fairly cheap, buy. If no, don’t. Sure, you could make money figuring out what the next big thing in software-as-a-service, fast-food franchises, or cell-phone chips will be. But it’s a lot simpler to buy Procter and Gamble, Coca-Cola, and the like, and expect that, over time, you will be rewarded. When you hold stocks for years instead of weeks, you pay long-term capital gains taxes — and only when you sell. The savings from this can multiply the value of your portfolio, over a long enough time period.
- If you must borrow, borrow with taxes mind. Credit cards, auto loans, and other kinds of consumer credit offer high interest rates, and no tax advantages. What a deal, huh? If you can, pay them down as soon as possible, and don’t let them accumulate in the first place. Instead, try to borrow with student loans and mortgages — both are subsidized, so the rates you get are often less than what large corporate buyers pay on their own debt.
- On a related note, Get education and home-buying out of the way early. These are both large investments (in time and dollar terms),so the longer you can spend collecting dividends rather than anticipating them, the happier you’ll be. If your income will go up $10,000 per year once you finish your Master’s degree, every year you delay costs you $10,000 — and means that the money you do get will be worth less to you now, since it’s now further into the future. For homes, the point is similar, but the emphasis is on the mortgage: the sooner you can take advantage of mortgage tax savings, and start putting away money in stocks, the faster your net worth will accumulate. If you use this strategy, an economic climate like the current one can be scary, but there’s a prudent strategy to keep in mind: ask yourself if the amount of money you’re borrowing, relative to what you own, would have seemed sane fifty years ago. If the answer is “yes”, don’t worry about the Dow day-to-day. If “no”, start paying down debt (besides your mortgage!),
- Never throw away what you can give away. It’s easy to forget the small deductions you can get from giving away your old possessions instead of just tossing them. It’s a minor hassle, but considering the tax savings, spending an hour or two on getting your old stuff to the Salvation Army can actually pay better than your day job — and you get the benefit of giving stuff away, too!
- If you must gamble, gamble tax-effectively. (Please note: if you work on Wall Street, please disregard this tip, as that’s where I’ve learned it). Many states have punitive taxes on gambling winnings. You may be taxed at regular income for your gross earnings, so if you bet $2,000 and win $2,200, you pay taxes on the full $2,200, and end up losing money. Other states have strict limits on how much you can deduct for your gambling losses. Instead, if you have the urge to gamble, I’d suggest throwing some money into stocks. Your tax treatment is much nicer in both directions, and there’s a small chance that your money will end up funding something productive, however indirectly.