Prepping for Tax Season

Kavan Choksi Talks About the Factors Investors Must Consider When Prepping for Tax Season


It is never too early for investors to think about implementing tax strategies that can save them money. Building wealth is the core objective of all investors. Hence, they must have a clear idea about the ways they can reduce the tax amount to be paid by them and improve investment opportunities. As per Kavan Choksi, there are a few important factors one has to take into account to see to it that they are not missing out on potential tax benefits.

Kavan Choksi underlines a few factors to keep in mind when preparing for the tax season

All investors firstly have to double-check their estimated tax payments and withholding to ensure that they are not under or over-withholding from the paycheck. A lot of people think that getting a considerable tax return is a good thing. However, one must note that the IRS does not pay interest to the taxpayers on the refund. Having too much money withheld from the income or overpaying quarterly estimated tax payments implies that one is forgoing the returns or potential interest the money could have generated. Withholding too little, however, can actually lead to a large bill at tax time, and hence should also be avoided.

If an investor has adequate financial resources, they should try to maximize their contributions towards tax advantaged accounts. It is better to make the contributions in 2023 itself rather than delaying it. Even if one has until year-end to make contributions to 401(k) or till the Tax Day for traditional or Roth IRA, early contributions will allow them to provide their money more time to benefit from potential long-term compound growth.

Kavan Choksi stresses on the fact that understanding the cost basis is critical for all investors while preparing for the tax season. All savvy and experienced investors know that managing their cost basis would be helpful in saving on taxes. The cost basis basically is what a person pays for an investment, like brokerage fees and any other trading costs. Their capital gain shall be the difference between the cost basis of the asset, as well as the price at which they sell it. However, in case they purchase the same investment over time, such as through a dividend reinvestment plans, every block of the shares purchased would have a distinctive holding period and cost. In such a scenario, investors can choose to sell the shares that will have the least tax impact.

All investors must make sure that their assets are located in the most tax-efficient investment accounts. For instance, it would be a prudent move to hold long-term investments in a taxable account, as any gains shall be taxed at a lower capital gains rate. A similar approach must be maintained for tax-efficient investments as well. These investments include funds or stocks that pay municipal bonds, qualified dividends and most index funds and ETFs. On the other hand, investors should keep the investments they are likely to hold for less than a year in tax-advantaged accounts, such as a 401(k), IRA, or Roth IRA. They must remember that short-term investments are taxed as ordinary income, which ideally is subject to a higher tax rate than capital gains.

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