What Is Investment Tax Planning?

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  • Written By: Angela Wheeland
  • Edited By: A. Joseph
  • Last Modified Date: 05 September 2019
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Investment tax planning is necessary to maximize an investor's capital gain and net worth. Investors generally buy and sell assets, such as stocks, mutual funds, real estate and bonds, to increase capital and plan for retirement. Generally, when an investor holds an asset, he or she is not responsible for paying taxes until the asset is sold or exchanged. If the investor receives a gain on the sale or exchange of an asset, he or she must pay tax on the gain, but if the sale or exchange results in a loss, the investor is not required to pay tax. Minimizing taxes is important to maximizing capital gain, so it is essential for investors to partake in investment tax planning strategies.

Investments can yield ordinary income, capital gains, tax-deferred income or tax-free income. Generally, investments yield capital gains after the sale of the asset, although some investments, such as limited partnerships and rental real estate, are considered passive activity and might be taxed as ordinary income based on the investor's tax bracket. Municipal bonds and certain retirement accounts are often tax-exempt investments, but if an investor withdraws from the investment before maturity or reaching the minimum retirement age, the investor might be required to pay taxes and penalties on the investment.


Tax-deferred investments produce capital growth and typically are not taxed until the investor begins withdrawing from the investment. Although tax-deferred investments are not considered long-term investments, they often are taxed as ordinary income, with the rate depending on the investor's financial tax bracket. It is important for investors to evaluate potential earnings and partake in investment tax planning before investing in tax-deferred investments.

The amount of tax assessed on a capital gain usually depends on several factors, including the investor's gross income and how long the asset was held. Investors who sell assets less than a year after purchase might owe more tax than those who hold an asset for more than a year. An investor must evaluate the length of time that he or she plans to hold the investment and determine the after-tax gain. Some instances might make it more favorable to sell an asset before a year, such as a projected decline in the market or immediate interest in the asset.

When an individual decides to purchase or partake in an investment, it is essential for him or her to determine the amount of capital gain after taxes. An investor's financial situation and prospective future investments determine whether the individual should invest in real estate, stocks, bonds or real estate. Proper investment tax planning can ensure that the investor gains the maximum capital from his or her investments.


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