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5 Tax Breaks That Benefit Wealthy Investors

Investing in securities can yield big returns but adding on to your wealth can potentially drive up your tax bill too. Cashing in on as many tax breaks and tax deductions as possible can minimize the financial hit. There are a number of tax loopholes that benefit wealthy investors, so if you happen to fall into that category, here are some examples that can help you save big.

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1. Capital Gains Tax

Capital gains tax is assessed when you sell off investments for a profit. The long-term capital gains tax rate, which applies when you hold investments for over a year, can be 0%, 15% or 20% depending on which tax bracket you fall into. For a wealthy investor who makes most or all of their money playing the market versus drawing a paycheck, that’s a much more favorable rate than the ordinary income tax rate, which tops out at 39.6%. That’s a reason to hold on to your assets before you sell them off again.

2. Capital Loss Deduction

If some of your investments tanked over the past year, you can use the loss to offset any gains you’ve made. The amount of capital losses you can claim on your taxes is capped at $3,000 for singles. But if you have losses to report over that amount, you can carry them over in future tax years.

3. Mortgage Interest Deduction

5 Tax Breaks That Benefit Wealthy Investors

Wealthy investors who are still paying down a mortgage on their home can enjoy a major tax write-off if they itemize. The more expensive the property is, the bigger the deduction that reduces your taxable income for the year. As of 2015, homeowners could deduct all of their mortgage interest on up to $1 million. This deduction can also be applied to the interest on a second home.

If you own a rental property as an investment, you won’t be able to deduct your mortgage interest, but there are other expenses you can write off. Some of the things that you can include as deductions to offset your rental income include the cost of repairs, maintenance, depreciation and any operating expenses you incur.

4. Investment Expense Deduction

Investment fees can easily run into the thousands each year, but wealthy investors don’t have to take it as a complete loss. The tax code allows you to deduct any investment expenses that exceed 2% of your adjusted gross income. So for example, if you make $100,000 a year, you’d be able to deduct any investment-related costs over $2,000.

Some of the expenses that you can write off include financial advisory fees, IRA custodial fees paid in cash, financial management software or online services, charges for automatic investment services and transportation costs that accumulate from travelling back and forth to your investment advisor’s office.

5. Appreciated Stock Donation Deduction

5 Tax Breaks That Benefit Wealthy Investors

If you’ve invested in a stock whose value has increased substantially since you initially purchased it, you can avoid getting hit with a big tax bill by donating it to charity. The IRS lets you deduct the full market value of long-term appreciated stock donations made to qualifying charitable organizations.

Since you’re donating the stock instead of selling it, you don’t have to worry about owing any capital gains tax on the earnings. You effectively get a double benefit by taking the deduction to reduce your taxable income and sidestepping the capital gains tax.

The Bottom Line

There are quite a few tax breaks that wealthy investors can’t afford to miss. If you’re new to investing but your long-term goal is to build some serious wealth, socking away as much money as you can in tax-advantaged accounts is a good place to start. From there, you can start reaping the tax rewards as your investments grow.

Photo credit: ©iStock.com/Predrag Vuckovic, ©iStock.com/Fertnig, ©iStock.com/woraput

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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