Tax rates and laws continuously evolve as local and federal governments forge the best economic conditions to meet their goals. Thus, having an effective tax planning strategy is crucial in meeting individual or business objectives without clashing with the government’s tax policies. Smart tax planning aims to reduce your tax obligations while operating within the law. Some smart tax planning strategies for a good long-term investment include;
Invest in Tax-Efficient Investments
Tax-efficient investments offer reduced taxation or even zero taxation on gains from those investments. Tax-conscious investors maintain a portfolio of tax-efficient investments like municipal bonds, long-term capital gains, tax-managed mutual funds, and retirement accounts, among others, to minimize the tax expenses on gains from these investments. For instance, gains from municipal bonds are usually tax-free, and those from securities like stocks and options are subject to taxation. Therefore, in times of economic uncertainties, one could opt for risk-free municipal bonds with lower taxes than highly volatile stocks subject to taxation.
Hold investments for longer periods
Investment taxations vary with the investment period. Short-term investments, i.e., those held within 12 months or lower, are taxed under the ordinary income tax rates. However, investments held for more than 12 months are usually at a lower tax scheme, i.e., a maximum of 23.25 per cent maximum and 30 per cent for individuals and companies, respectively, which varies according to long-term capital gains policies by the Australian Taxation Office. Therefore, holding an appreciating asset, say stock or option contracts, for more than a year, would be more tax effective. For example, the returns on an investment held for a year when taxed under the ordinary income tax rates, then the tax rates increase with an increase in the returns. However, investments held for more than one year have a maximum tax rate of 23.25 per cent. Additionally, the Australia Taxation Office provides a 50% discount on capital gains or losses for Australian residents, leaving you with more in your pocket.
Consider Tax Loss Harvesting
Tax loss harvesting is a tax-efficient technique that allows you to lower your taxable income from an investment by offsetting its gains with the losses of another asset. This technique allows an investor not to incur losses and taxes from the winning investment and rather lowers its taxable income as it offsets the loss from the other asset. Moreover, if your investment losses exceed your gains, you can use this technique to offset up to USD 3000 of taxable income annually. For instance, say you bought a certain volume of Asset A at AUD 10,000 in 2015. In 2022, the asset market value will be AUD 97,105.20. You also invested in asset B in 2016 at AUD 10,000; in 2022, its market value is at -AUD 7,568.38. From Asset A, you have gains of AUD 87,105.2 and a net loss from Asset B of – AUD 2,431.62. You can decide to hold asset B through to 2023, hoping that it might appreciate and sell asset A, incurring capital gains taxes on the AUD 87,105.2. This will imply that you will incur capital gains taxes on asset B upon selling it in 2023. However, with loss harvesting, you would sell both assets simultaneously and have a net gain of AUD 84,673.58. Therefore, the total taxation on your gains will be lower as your taxable gain for the year has reduced from AUD 87,105.2 to AUD 84,673.58.
Every investor’s dream is to maximize their investment returns while complying with government tax policies. Therefore, investors should employ smart tax planning strategies like tax loss harvesting and long-term investment and consider tax-efficient investments to achieve these ends.