The Part of Investing You Still Need to Master: 4 Legal Tactics to Slash Your Tax Bill

Key Takeaways

You may be responsible for interest income and capital gains (or losses) for assets you hold.
Consider holding a mix of accounts, including tax-deferred, taxable, and tax-free accounts, such as a Roth IRA, to minimize your tax liability.
Delaying your required minimum distributions from retirement accounts can lower the amount of taxable income you receive during retirement.
Use tax-loss harvesting tools, like those offered by top robo-advisors, to reduce your tax burden and rebalance your financial portfolio.
Donate appreciated stock to the qualified charities of your choice.

Investing helps your money work for you so you can accumulate wealth over time. But one thing can stand in your way if you don’t plan appropriately: taxes. If you don’t have a legal strategy in place, they can reduce your investment income. Consider finding a good mix of tax-efficient assets and tax-deferred accounts, such as a traditional IRA, to slash your investment tax bill. You should also consider delaying your required minimum distributions (RMDs) from your retirement accounts and making tax-efficient charitable donations.

Consider These Types of Assets

Assets are treated differently for tax purposes, so it's important to understand the tax implications before you make your investments. Let's take a look at how income and profits are treated for stocks and bonds.

Stocks

When stocks are sold for a profit, how they’re taxed depends on the holding period. If you’ve held them for less than 12 months, you’re liable for short-term capital gains. This means your profits are taxed at your ordinary tax rate, which ranges from 10% to 37% in 2025.

2025 Tax Brackets
Tax Rate	Single	Married Filing Separately	Married Filing Jointly/Surviving Spouse	Head of Household
10%	$0 to $11,925	$0 to $11,925	$0 to $23,850	$0 to $17,000
12%	$11,926 to $48,475	$11,926 to $48,475	$23,851 to $96,950	$17,001 to $64,850
22%	$48,476 to $103,350	$48,476 to $103,350	$96,951 to $206,700	$64,851 to $103,350
24%	$103,351 to $197,300	$103,351 to $197,300	$206,701 to $394,600	$103,351 to $197,300
32%	$197,301 to $250,525	$197,301 to $250,525	$394,601 to $501,050	$197,301 to $250,500
35%	$250,526 to $626,350	$250,526 to $375,800	$501,051 to $751,600	$250,501 to $626,350
37%	$626,351 or more	$375,801 or more	$751,601 or more	$626,351 or more

Long-term capital gains, on the other hand, are taxed at a lower rate and are based on your tax filing status and your taxable income as shown in the chart below.

Tax Rate	Single	Married Filing Separately	Head of household	Married Filing Jointly
0%	Up to $48,350	Up to $48,350	Up to $64,750	Up to $96,700
15%	$48,351 to $533,400	$48,351 to $300,000	$64,751 to $566,700	$96,701 to $600,050
20%	Over $533,401	Over $300,001	Over $566,701	Over $600,051

Bonds

The income on bonds depends on several factors. The first factor depends on who issues the bond and the second depends on whether you end up with a capital loss or capital gain if you sell it before maturity.

For interest income:

Corporate bonds: These bonds are issued by companies. If you purchase these bonds, you are required to report and pay federal and state taxes on any interest income they generate.
Treasury bonds: The interest income on these securities is taxable at the federal level, but you do not pay state taxes on that income.
Municipal bonds: You are not required to pay federal taxes on the interest income generated by these bonds. The same goes for state taxes if you live in the state that issued them.

Capital gains and losses on bonds are earned and reported the same way as any other securities, such as stocks. If you buy them on the secondary market, hold them for less than 12 months, sell them and earn a profit, that results in a short-term capital gain and is taxed as ordinary income. If you hold a bond for more than a year, that’s a long-term capital gain and is taxed at 0%, 15%, or 20% as per the chart above.

Use a Mix of Tax-Deferred Accounts, Taxable Accounts, and Tax-Free Accounts

Tax-deferred accounts are great for investments that generate income, like non-qualified dividend-producing stocks and bonds. The earnings grow tax-free and you don’t pay taxes until you begin withdrawing the money. Examples of these accounts are employer-sponsored plans, such as 401(k)s and 403(b)s, and traditional individual retirement accounts (IRAs).

Hold non-income-producing assets like growth stocks in taxable accounts like those offered by top online brokerages. Other taxable accounts include savings accounts and certificates of deposit (CDs). These don’t offer any special tax treatment.

Tax-free accounts, such as Roth IRAs and Roth 401(k)s, allow you to take advantage of tax-free growth and withdrawals. For instance, contributions to a Roth IRA are made using after-tax dollars and qualified withdrawals are tax-free during retirement.

Tip

Taxes can be complicated, especially when you're dealing with complex investments. Consider speaking with a tax or financial professional if you need guidance.

Delay Taking RMDs

A required minimum distribution (RMD) is the minimum amount of money that you must withdraw from certain tax-deferred retirement accounts after a certain age. These accounts include employer-sponsored plans like 401(k)s and 403(b)s and traditional IRAs.

According to the IRS, you must start taking RMDs by April 1 after you turn 73. So if you turned 73 in 2024, your first RMD was due by April 1, 2025, and your second RMD is due by December 31, 2025.

If you delay taking your RMDs, your investments may continue to grow on a tax-deferred basis. This means that the money in your account continues to grow without any tax implications until you withdraw the money.

Keep in mind, though, that there are very few exceptions to delay your RMD without incurring a penalty. For instance, you can avoid the penalty from an employer-sponsored plan if you still work for that company.

Use Tax-Loss Harvesting

Tax-loss harvesting is a strategy you can use to sell investments that are losing value, such as stocks and exchange-traded funds (ETFs), to offset those you’ve sold for a profit that results in capital gains. Using this strategy can be beneficial in the following ways:

Reduces your tax burden: When you implement tax-loss harvesting as part of your investment. and tax planning strategies, you reduce capital gains and, therefore, your ordinary income.
Optimizes your financial portfolio: You can review your financial portfolio to find assets that are underperforming or losing value. You can then make cash available that can be reinvested and reallocated elsewhere. This allows you to identify future growth opportunities.

The Internal Revenue Service (IRS) does not allow taxpayers to sell and buy the same (or substantially similar) securities within 30 days of the transaction in what it calls a wash sale rule. This means you will not be able to deduct the loss for tax purposes if you abuse the rule. So if you do, you’ll end up with a higher tax liability.

Make Tax-Efficient Charitable Donations

You can avoid incurring capital gains by donating any of your appreciated stock directly to the charity (or charities) of your choice. For the donation to count, the organization must be a qualified charity, which means it must have tax-exempt status with the IRS. When you donate the stock, you avoid realizing the capital gains tax and you can also deduct the fair market value (FMV) of the donation, provided you itemize your deductions.

The Bottom Line

You work hard for your money. So why not be smart and use some legal tricks to keep most of it in your pocket? Understand the tax implications of your investments and how a mix of different accounts can work in your favor. Delaying your RMDs and tax-loss harvesting are two options, but you may also want to consider making charitable donations using appreciated stock. Remember, these are just suggestions. If you need more guidance or help, speak to a tax or financial expert.