This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

5 Tax Mistakes Investors Make

Taxes are an emotional issue. Sometimes, people's focus on avoiding them can distract them from what is in their best interests.

Here are five mistakes you should avoid when managing the taxes on your investments.

1. Overlooking taxable retirement distributions

Qualified retirement plans have certain tax advantages. Money going into a traditional IRA or a 401(k) can be deducted from your income, and earnings on your investments within these plans is tax exempt as well. There is a catch, though: The distributions you ultimately take out of these plans is taxed as income at that point.

This has a couple implications. First, when you are doing your retirement planning and figuring out how much income you'll need, be sure to account for the fact that money coming out of a retirement plan will be taxed. Second, depending on your tax bracket, there may be a disadvantage to having growth investments in your IRA, since any gains will ultimately be taxed as income, and not at the capital gains rate.

2. Trying too hard to avoid capital gains taxes

Speaking of capital gains, people are sometimes reluctant to sell stocks when they are up because realizing the gain will make it subject to taxation. However, it's important not to let the tail wag the dog. Paying a 15 percent tax on a 50 percent gain will actually cost you only 5 percent of the total value of the investment. You could lose much more than 5 percent if the investment goes south on you while you are putting off selling.

3. Harvesting capital losses carelessly

Some investors like to "harvest" losses near the end of the year to offset gains. When you do this, keep in mind the potential opportunity cost. Harvesting a 20 percent loss would have a tax benefit equivalent to less than 4 percent of the investment's current value, so you shouldn't sell if you think that stock might bounce back by 4 percent or more during the 30-day waiting period before you would be permitted to repurchase the stock.

4. Gambling on off-shore accounts

Cypress is an example of an off-shore haven that was popular with people trying to shelter money from their own governments. But when the banking system in Cypress was in crisis, many of those foreign accounts were assessed huge levies to bail out the banks. Those investors probably wish they had just paid their taxes in the first place. Tax evasion is not only cheating, but if it involves moving money out of the country, it also entails giving up the protections of U.S. law and FDIC insurance.

5. Forgetting Treasury securities

Considering how some people go overboard to avoid taxes, the tax benefit of owning U.S. Treasury securities is surprisingly overlooked. Income on these securities is subject to federal taxes, but exempt from state and local income taxes. This might be especially relevant now because Treasury yields have been rising while CD rates have not. So a five-year Treasury might be an attractive income alternative to a five-year CD, with the added benefit of a break on state and local taxes.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free


Chart of I:DJI
DOW 17,813.39 +1.20 0.01%
S&P 500 2,088.87 -0.27 -0.01%
NASDAQ 5,116.1430 +13.3350 0.26%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs