The Advantages of Tax-Managed Stocks
- Tax-managed stocks are a type of investment that aims to reduce taxes that are incurred when investors make a profit. If investors quickly trade stocks, they may have to pay income taxes on the profit that they receive. Even if they dodge the income tax, they must pay capital gains taxes based on how they bought the stock, the dividends they received, and what the value of the stock was when they sold it. This creates a complex tax environment where some investors prefer to focus on investment strategies that delay and reduce taxes.
- The key advantage to tax-managed stocks is the greater profit that results in selling stock at the proper time. By waiting until lesser taxes apply to stock and arranging investments so that falling stocks can be replaced at the right time, investors can find the path to the least federal taxes. By lowering the amount of taxes they have to pay, they are raising the amount of profit they actually receive. It is more difficult to cut taxes on dividends, but tax-managed stocks that do this also save investors money.
- Not only are short-term profits taxed more heavily, they also make it difficult for investors to plan for their future. Short-term profits are more subject to the rise and fall of the market, making it easier for investors to lose money as well as gain it. But tax-managed stocks aim for long-term profits as a way to reduce taxation. This also leads to long-term planning on the part of the investor, enabling him to create a more secure financial future.
- There is another benefit to long-term strategies used in tax-managed stocks: people can use the money for longer periods of time. In short-term strategies, the taxes are higher and investors sell quickly to realize immediate earnings. If they keep the stocks for a longer period of time to avoid the higher taxes, investors can also benefit from more stock value and more dividends, allowing earnings growth that would not have been possible otherwise.
