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It’s Tax Season Again! Tips for Every Investor


Like it or not it's time to pay the price for being an American: that's right, the tax deadline is upon us once more.

There may not be any way to ease the sting but in this edition of Investing 101 Greg Rosica, the co-author of Ernst & Young Tax Guide for 2012 gives investors tips and rules of thumb for minimizing both the pain and maybe even the cost of what you have due this April 17th.

In the attached video clip, Rosica lays out five key tax tips for every investor.

1) Types of Taxable Income

Not all income is created equal when it comes to taxes. Wages, interest, dividends, and capital gains from stocks or mutual funds are all treated differently when it comes to tax rates. Adding up everything that flowed into your accounts over the year and calling it "income" is going to lead into you paying more than your fair share.

2) Asset Location

Not only do rates vary but you may not to have to pay taxes on gains at all, provided you're holding assets in a 401(k), IRA or other accounts where you can defer paying taxes on gains for years. Only your taxable accounts --typically vanilla brokerage or accounts that allow you to deposit and remove money at your will-- are subject to annual rates.

3) Dividend Distinctions

If you received dividend income over the year, make sure to distinguish between Qualified or Unqualified. Qualified dividends are the most common form. They come from a U.S. or qualifying foreign company and come from their net earnings. The rate on those dividends is capped at 15%.

In contrast, Unqualified dividends are those paid for by foreign companies that do not benefit from a U.S. tax treaty or a U.S. company paying dividends to avoid its own taxation. The rate on these payments maxes out as high as 35%, just like ordinary income.

4) Capital Gains "Netting"

Determine whether you've made or lost money in your total portfolio. If you've made $10,000 from one investment but lost $7,000 from others, only the $3,000 "Net" gain is taxed. Of course if the reverse is true, meaning you realized $10,000 in losses against $7,000 in gains, you've got a tax credit coming your way!

For those with a net investing loss, up to $3,000 per year can be applied against other forms of income to reduce your total tax bill. Better still, the losses can be carried forward and applied to your income for years should losses exceed $3,000.

5) Painful Common Mistakes

Taxes are rough enough as it is; overpaying is an idea too painful to consider, yet Rosica sees it all the time.

Pushed to identify one common mistake investors need to avoid, Rosica says it's overpaying on capital gains from Mutual Funds or ETFs. During the life of these investments the fund or ETF is either distributing dividends or reinvesting money into the fund itself after taxes. In English, it's possible your gains aren't what you'd expect if, for instance, you bought a fund for $5 and sold it years later at $10.

The most important takeaway is to get organized and stay ahead of your tax bill. Tax day isn't a final exam you can cram for one night ahead of time, but rather the culmination of a year's worth of work. Some folks can do it by themselves, but for most of us spending some time with a tax professional will pay for itself.

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