Our society is obsessed with not paying taxes. Just take a look at some of these famous quotes about taxes (that the IRS themselves put together!):
Americans are obsessed with having to pay taxes and finding ways to avoid doing so. We get it, but sometimes that fear can go too far and mess with your investing strategy. That’s what we’re here to clear up.
[01:39] Dustin’s cautionary tale about taxes clouding your judgment
[05:30] Our fear of tax consequences
[08:50] Society’s obsession with taxes
[10:28] Changing your tax mindset
[11:55] All about ETFs, or exchange-traded funds
[14:48] The oh-so-valuable bucket strategy
[16:43] A great tip about long-term capital gains
Dustin kicked off this episode with a cautionary tale about a previous client from back in the day. This client put all his stock into the company he used to work for before retirement. One company. That basically meant his future hinged on the success or failure of this one company. When Dustin advised him to sell his stock when they were at a high, he declined. Why? Because he would have had to pay taxes.
We’re not quite sure where the obsession with (not) paying taxes came from, but that’s not really the point of our episode. What matters is how your tax mindset affects your investment strategy. More specifically, how your fear of tax consequences can hold you back. (There’s our good ol’ friend fear again!) When your feelings about taxes stop you from making good investment decisions, that’s when it starts to become a problem.
The good news is, you can get over your fear of tax consequences and start investing with confidence. To start, you need to change your tax mindset.
We’re big believers in understanding financial fears, because that’s the first step in overcoming them. Ask yourself, what do you believe about taxes? Are you on former president James Madison’s side, or do you lean more towards Arthur Godfrey’s? Are taxes a necessary good or a necessary evil?
Try thinking of taxes simply as “the cost of doing business,” as Dustin put it in this episode. Rather than seeing the negative (the government took out $30k of the $100k I made!) try to see the positive instead (I took home $70k, awesome!). Maybe it sounds a little dorky to focus on the positive, but it goes hand in hand with our second of Nine Commandments: net worth is king. Focus on your assets, or the positive, rather than your debts, or the negative. It’s a great perspective you can use for your taxes, too.
After you change your mindset, there are few other strategies you can use to tackle taxes and investing. We talk about each strategy more fully in the episode (meaning… tune in!), but let’s review here real quick. One is ETFs, or exchange-traded funds. Simply put, with ETFs, you don’t have to pay extra taxes on capital gains distributions each year.
Speaking of capital gains, we shared another strategy for saving money on taxes: by holding your investment for a year. Capital gains are essentially a profit you make from selling an asset like a stock. Say you buy a stock at $10 and it grows to $15. If you sell that stock within a year, you have to pay taxes on that $5 difference you made! That’s because it’s treated as income.
But if you hold it for longer than a year, you only have to pay long-term capital gain taxes. For most people who bring in a certain amount of income, that tax is zero. Zip. Nada. For other people who bring in almost $500k, long-term capital gain tax is still pretty low. So by holding off for a year, you spend less money on taxes.
We know, we know: tax information can get crazy confusing fast. And when you’re new to investing, that fear of paying more taxes than you think you need to can be really scary. That’s why working with a CERTIFIED FINANCIAL PLANNER™ (and listening to the Wealth by Design podcast!) can help you understand your options and build a smart investment strategy.
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