Aug
03
2023
Unrealized Gains & Losses, Explained
An unrealized gain or loss is the change in market value of an asset from its purchase price, before it is sold.
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SoFi
Student Loan Consolidation and Refinancing
Aug
01
2023
What Are Non-Transparent ETFs?
Unlike ordinary exchange-traded funds (ETFs), which disclose their underlying assets daily, non-transparent ETFs are only required to reveal their holdings on a quarterly or monthly cadence. This ability to conceal their assets can help active non-transparent ETF managers to cloak their strategies for longer periods, with the aim of maximizing performance.
To understand some of the advantages these funds may offer investors, it helps to compare them with standard ETFs.
Why Would You Invest in Non-Transparent ETFs?
For nearly 30 years, exchange-traded funds (ETFs) have been a mainstay for big institutional investors as well as individuals, thanks to their transparency, tax efficiency, and low cost. Today, the ETF industry in the U.S. has billions, if not trillions, under management.
Traditionally, investors have found ETFs an attractive option because of their liquidity, which has made ETFs more transparent than mutual funds. Unlike mutual funds, you can trade ETF shares throughout the day on an exchange, similar to stocks. And the way shares are created and redeemed gives investors more visibility into the funds’ underlying assets, compared with mutual funds. This ‘transparency’ has been true of both actively managed ETFs as well as passive ETFs, which track an index such as the S&P 500.
But the fundamental transparency of the ETF “wrapper” or fund structure has been a thorn in the side of some active ETF managers, who may prefer less visibility around their holdings for strategic reasons. Hence the appeal of non-transparent ETFs to active managers.
Active non-transparent ETFs — also called ANT ETFs — aren’t required to reveal their assets daily, as noted above; rather they report a snapshot of what they hold on a monthly or quarterly basis, similar to a mutual fund. In some cases they report the assets they hold, but not how much they hold.
Recommended: ETFs vs. Index Funds: What’s the Difference?
💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.
How Passive vs. Active Strategies Can Impact Transparency
If you think about it, the evolution of active non-transparent ETFs makes sense in the larger context of the ETF universe, where passively managed ETFs comprise more than 90% of that market.
Passively managed ETFs offer some of the lowest ETF fees in today’s market, which is one reason they’re typically cheaper to own than mutual funds. The overall tax efficiency of index ETFs also helps to lower investing costs, and has contributed to their overall popularity with investors.
ETFs, of course, are also valued for their role in adding diversification to investors’ portfolios, with many ETFs invested in specific sectors (e.g. electric vehicles, pharmaceuticals) or securities (e.g. U.S. Treasuries, corporate bonds).
No matter whether an ETF is invested in a broader equity market or a niche sector, passive ETFs are designed to mirror or track the stocks in a certain index. Thus the transparency of these funds is part of how they work.
That’s not true of active ETFs, which rely on the oversight of a fund manager to choose the underlying assets (just like an active mutual fund). But because ordinary ETFs require a daily disclosure of the fund’s holdings, this can hamper an active manager’s ability to execute their investment strategies.
When a fund’s assets are disclosed on a daily basis, the market can bid up the price for their holdings. And while in the short term this might be good (the assets could go up), in the long term it could disrupt the fund manager’s strategies. And, if other investors try to anticipate the trades that active managers might make, sometimes called front running, that could cause asset prices to fluctuate and potentially impact the ETF’s performance.
The Use of Proxies in Non-Transparent ETFs
How might a non-transparent ETF solve this problem?
The way ETFs keep their price in line with their assets is that the sponsor of the ETF trades throughout the day with an “authorized participant.” These authorized participants will create and redeem “baskets” of securities, i.e. the stocks or bonds that the ETF holds, and then trade them to the ETF for shares of the fund, which allows the ETF to stay in line with the price of its underlying stocks.
This process obviously requires a great degree of transparency across the board. So, how does a non-transparent ETF obscure its holdings? The answer is, by the use of “proxies”: These are baskets of stock that are similar to but not identical to the underlying holdings of the ETF.
Thus, non-transparent ETFs are able to occupy a happy middle ground in the ETF world: they enable fund managers to conceal their strategies while keeping the liquidity of pricing that is core to trading ETFs overall.
The History of Non-Transparent ETFs
For years, the ETF industry was composed mostly of index ETFs, which helps to explain why the universe of ETFs is primarily passive. But over time, some investment companies began seeking regulatory approval for non-transparent ETFs, also sometimes called semi-transparent ETFs, in order to pursue more active strategies. The approval for these funds, and the technology underlying the non-transparent strategy, began rolling out in late 2019, and ANT ETFs have seen steady inflows since then.
Though non-transparent ETFs are still a relatively small part of the overall ETF market, this sector is gaining traction and is now approaching $2 billion AUM. This reflects a similar trend among active ETFs, which have also seen more inflows this year.
💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.
The Takeaway
Non-transparent ETFs may be a relative newcomer in the multi-trillion-dollar world of ETFs, but they offer an attractive new opportunity for investors who are interested in active investment styles — but still want the cost efficiency and liquidity of an ETF. Non-transparent ETFs also give active fund managers the ability to cloak their strategies, which may aid potential outcomes.
As with all ETFs, they may have a place in an investor’s portfolio. But it’s generally best that investors do some research or consult with a financial professional before investing.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Photo credit: iStock/ANA BARAULIA
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
SOIN0723038
Read moreAug
01
2023
What You Need to Know About SPACs Before You Invest
SPAC stands for “special purpose acquisition company,” and these entities act as a shell that can raise money in order to acquire another active company that wishes to go public.
Companies that want to have an initial public offering (IPO) can use SPACs to make it happen. SPACs themselves are publicly traded, and some investors are buying SPAC shares in an effort to get in as early as possible on companies going public — but it’s rare that the average investor will have access to SPAC shares.
But SPACs, like many investments, are not something you want to jump into without doing some homework first. In addition, the Securities and Exchange Commission (SEC) has proposed new rules to make SPACs more transparent, and limit conflict-of-interest in these mergers.
What Is a SPAC?
SPACs are legal business entities that don’t have any assets or conduct any sort of business activity. In effect, they’re empty husks. That’s why they’re often called “blank check companies.”
As for their purpose, SPACs can be used to take companies public. So, instead of going through the traditional IPO process, many companies are instead using SPACs to get themselves listed on the stock markets.
💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.
SPACs and Acquisitions
As for how a SPAC takes a company public, the process is basically a reverse merger, when a private business goes public by buying an already public company.
Here’s a step-by step:
• A SPAC goes public, selling shares and promising to use the proceeds to buy another business.
• The SPAC’s sponsors set their sights on a company it wants to take public — an acquisition target.
• The SPAC often raises more money to acquire the target. Remember, SPACs are already publicly traded, so when it does acquire a target, the target is absorbed by the SPAC, and then becomes public too.
Recommended: What Happens to a Stock During a Merger?
So, why would a company want to use a SPAC transaction to go public rather than go the traditional IPO route? The simple answer is that it can be much faster and easier.
For instance, a merger between a SPAC and its target can take between four to six months, whereas the traditional IPO route can take 12 to 18 months.
[ipo_launch]
How Do I Invest in SPACs?
SPACs are designed to raise money so that they can acquire their target. To raise money, they need investors, which is why they’re generally publicly traded. In theory, retail investors can invest in SPACs — in most cases, a brokerage account is all that’s required. But a 2022 SEC analysis shows that very few retail investors actually gain access to SPAC shares.
5 Things to Know Before Investing in SPACs
Before you pursue what could be a risky investment, run through this list of considerations:
1. Failure to Find Target
SPACs exist for one reason: To acquire a target company and take it public. But there’s a chance that some could fail to do so — something that prospective investors should take seriously. The clock is ticking, too. If a SPAC does not acquire a target within a specific time frame — typically two years — it could liquidate.
💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.
2. Investor Dilution
SPAC investors also run the risk that their shares could be diluted, or lose value. Meaning: The folks running the SPAC may throw in additional funding that can erode the value of those shares.
That dilution can happen during the merger process. As the merger takes place, fees are paid, warrants are exercised, and the SPAC’s sponsor receives 20% ownership in the new entity. All this can take ownership from investors’ shares, diluting them.
3. Poor Performance
Some companies that go public via a SPAC transaction don’t do so well after the merger. Their stock values don’t perform as many investors have hoped. This is yet another very real risk that SPAC investors must contend with.
As SPAC targets are private companies, investors can be limited in the amount of research they can do on the targets. Their financial records may be difficult to find. As a result, investors are basically relying on the due diligence of the SPAC sponsor. So there’s an element of trust — and risk — at play.
What investors should know is that many companies that have gone public through a SPAC underperform compared to the broader market at large.
4. Big Names Can Cloud Investor Judgment
It can be easy to get caught up in the hype around certain SPACs. Whether the SPAC itself is targeting a particularly noteworthy company to take public, or if it’s being managed by a big-name investor or famous person, the glitz and glamor may blind investors to certain risks.
It may be fun to think that you’re getting in on an investment with a celebrity. But that doesn’t mean that the investment they’re attached to is necessarily a good one, or the right one for you.
5. Uncertain Future
SPACs, in recent years, were a hot commodity. But since there are some significant risks involved in investing in SPACs, regulators stepped in to make some changes that would protect average investors.
Given the lack of transparency around SPACs and the general fast-and-loose approach that the markets are talking to them, the government and other watch dogs are already calling for some reforms.
Among them: Tamping down on SPAC hype, like protecting investors from misleading information or expectations, enhancing disclosures, and being more forthcoming about the risks to investors.
The Takeaway
There’s a lot to consider about SPACs from an investor’s point of view. But the important thing to remember is that SPACs are speculative, risky investments. Investing in SPACs will likely require a high risk tolerance for most investors, and it’s a good idea that you have your other financial ducks in a row before dedicating any money to it.
Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.
New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SOIN0623092
Read moreJul
16
2023
Mortgage Interest Deduction Explained
Homeownership has long been a part of the American dream, and it opens the door to benefits like the mortgage interest deduction for those who itemize deductions on their taxes.
Itemizing typically makes sense only if itemized deductions on a primary and second home total more than the standard deduction, which nearly doubled in 2018.
Here’s what you need to know about the mortgage interest deduction.
What Is the Mortgage Interest Deduction?
The mortgage interest deduction allows itemizers to count interest they pay on a loan related to building, purchasing, or improving a primary home against taxable income, lowering the amount of taxes owed.
The tax deduction also applies if you pay interest on a condominium, cooperative, mobile home, boat, or recreational vehicle used as a residence. The deduction can also be taken on loans for second homes, as long as it stays within the limits.
States with an income tax may also allow homeowners to claim the mortgage interest deduction on their state tax returns, whether or not they itemize on their federal returns.
What Are the Rules and Limits?
The passage of the Tax Cuts and Jobs Act of 2017 was a game-changer for the mortgage interest deduction. Starting in 2018 and set to last through 2025, the law greatly increased the standard deduction and eliminated or restricted many itemized deductions.
For the 2022 tax year, the standard deduction is $25,900 for married couples filing jointly and $12,950 for single people and married people filing separately. For 2023, the standard deduction is $27,700 for married couples filing jointly and $13,850 for single people and married people filing separately.
If you itemize deductions, you’re good to go and can deduct the interest. There’s further good news, as you may also be able to deduct interest on a home equity loan or line of credit, as long as it was used to buy, build, or substantially improve your home.
The loan must be secured by the taxpayer’s main home or second home and meet other requirements. For tax purposes, a second home not used for income is treated much like one’s primary home. It’s a home you live in some of the time.
The IRS considers a second home that’s rented some of the time one that you use for more than 14 days, or more than 10% of the number of days you rent it out (whichever number of days is larger). If you use the home you rent out for fewer than the required number of days, it is considered a rental property—one that you never live in, and not eligible for the mortgage interest deduction.
Generally, your interest-only mortgage is 100% deductible, as long as the total debt meets the limits.
According to the Internal Revenue Service, you can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of debt. Higher limitations ($1 million, or $500,000 if married filing separately) apply if you are deducting mortgage interest from debt incurred before Dec. 16, 2017.
You can’t deduct home mortgage interest unless the following conditions are met:
• You must file Form 1040 or 1040-SR and itemize deductions on Schedule A (Form 1040).
• The mortgage must be a secured debt on a qualified home in which you have an ownership interest.
Simply put, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. If you can’t pay the debt, your home can then serve as payment to the lender to satisfy the debt.
A qualified home is your main home or second home. The home could be a house, condo, co-op, mobile home, house trailer, or a houseboat. It must have sleeping, cooking, and toilet facilities.
Know that the interest you pay on a mortgage on a home other than your main or second home may be deductible if the loan proceeds were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and is not deductible.
💡 Quick Tip: Don’t overpay for your mortgage. Get your dream home or investment property and a great rate with SoFi Mortgage Loans.
How Much Can I Deduct?
No doubt you want the answer to that question. In most cases, you can deduct all of your home mortgage interest. How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds.
The IRS says that if all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category.)
1. Mortgages you took out on or before Oct. 13, 1987 (called grandfathered debt).
2. Mortgages you (or your spouse if married filing jointly) took out after Oct. 13, 1987, and prior to Dec. 16, 2017, to buy, build, or substantially improve your home, but only if throughout 2020 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately).
(There is an exception. If you entered into a written contract before Dec. 15, 2017, to close on the purchase of a principal residence before Jan. 1, 2018, and you purchased the residence before April 1, 2018, you are considered to have incurred the home acquisition debt prior to Dec. 16, 2017.)
3. Mortgages you (or your spouse if married filing jointly) took out after Dec. 15, 2017, to buy, build, or substantially improve your home, but only if throughout 2020 these mortgages plus any grandfathered debt totaled $750,000 or less ($375,000 or less if married filing separately).
The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home.
What Are Special Circumstances?
Just like you need to understand your home loan options, you need to know the special situations where the IRS says you might or might not qualify for the mortgage interest deduction.
You can deduct these items as home mortgage interest:
• A late payment charge if it wasn’t for a specific service performed in connection with your mortgage loan.
• A mortgage prepayment penalty, provided the penalty wasn’t for a specific service performed or cost incurred in connection with your mortgage loan.
Recommended: Guide to Buying, Selling, and Updating Your Home
Is Everything Deductible?
The government is only so generous, and there are many costs associated with homeownership. Some of them are not tax deductible under the mortgage interest deduction, like homeowners insurance premiums.
One caveat: You might be able to write off a portion of insurance, as well as utilities, repairs, and maintenance, if you have a home office and deduct those expenses on Schedule C.
Also not on the list for inclusion in the mortgage interest deduction are title searches, moving expenses, and reverse mortgage interest. Because interest on a reverse mortgage is due when the property sells, it isn’t tax deductible.
💡 Quick Tip: Have you improved your credit score since you made your home purchase? Home loan refinancing with SoFi could get you a competitive interest rate with lower payments.
How to Claim the Mortgage Interest Deduction
An itemizer will file Schedule A, which is part of the standard IRS 1040 tax form. Your mortgage lender should send you an IRS 1098 tax form, which reports the amount of interest you paid during the tax year. Your loan servicer should also provide this tax form online.
Using your 1098 tax form, find the amount of interest paid and enter this on Line 8 of Schedule A on your tax return. It’s not a heavy lift but gets a tad more complicated if you earn income from your property. If you own a vacation home that you rent out much of the time, you’ll need to use Schedule E.
Furthermore, if you’re self-employed and write off business expenses, you’ll need to enter interest payments on Schedule C.
The Takeaway
You can take the mortgage interest deduction if you itemize deductions on your taxes. Keep in mind that it’s typically only worth taking if the write-offs exceed the standard deduction.
The mortgage interest deduction, though, can be a bonus of sorts, especially if you’re a homeowner with a second home.
As with all matters that affect your taxes, you’ll want to consult with your financial advisor about claiming the deduction.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SOHL0623080
Jul
11
2023
How to Pay Less Taxes: 9 Simple Steps
Taxes are part of life, but many people would like to know if there are any ways to lower their tax bill.
While paying no taxes isn’t likely, there are ways you can use the tax code to reduce your taxable income and tax liability. These range from knowing the right filing status to maxing out your retirement contributions to understanding which deductions and credits you may qualify for.
Read on to learn some smart strategies for lowering your tax bill without running afoul of the IRS.
1. Choosing the Right Filing Status
If you’re married, you have a choice to file jointly or separately. In many cases, a married couple will come out ahead by filing taxes jointly.
Typically, this will give them a lower tax rate, and also make them eligible for certain tax breaks, such as the earned income credit, the American Opportunity Credit, and the Lifetime Learning Credit for education expenses. But there are certain circumstances where couples may be better off filing separately.
Some examples include: when both spouses are high-income earners and earn the same, when one spouse has high medical bills, and if your income determines your student loan payments.
Preparing returns both ways can help you assess the pros and cons of filing jointly or separately.
💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.
2. Maxing Out Your Retirement Account
Generally, the lower your income, the lower your taxes. However, you don’t have to actually earn less money to lower your tax bill.
Instead, you can reduce your gross income (which is your income before taxes are taken out) by making contributions to a 401(k) retirement plan, a 403(b) retirement plan, a 457 plan, or an IRA.
The more you contribute to a pre-tax retirement account, the more you can reduce your adjusted gross income (AGI), which is the baseline for calculating your taxable income. It’s important to keep in mind, however, that there are annual limitations to how much you can put aside into retirement, which depend on your income and your age.
Even if you don’t have access to a retirement plan at work, you may still be able to open and contribute to an IRA. And, you can do this even after the end of the year.
While the tax year ends on December 31st, you may still be able to contribute to your IRA or open up a Roth IRA (if you meet the eligibility requirements) until mid April.
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3. Adding up Your Health Care Costs
Healthcare expenses are typically only deductible once they exceed 7.5% of your AGI (and only for those who itemize their deductions). But with today’s high cost of medical care and, in some cases, insurance companies passing more costs onto consumers, you might be surprised how much you’re actually spending on healthcare.
In addition to the obvious expenses, like copays and coinsurance, it’s key to also consider things like dental care, Rx medications, prescription eyeglasses, and even the mileage to and from all medical appointments.
4. Saving for Private School and College
If you have children who may attend college in the future, or who attend or will attend private school, it can pay off to open a 529 savings plan.
Even if your children are young, it’s never too early to start setting aside money for their education. In fact, because of the long-term compounding power of investing, starting early could help make college a lot more affordable.
Recommended: Compound vs. Simple Interest
A 529 savings plan is a type of investment account designed to help parents invest in private schools or colleges in a tax-advantaged way. While you won’t typically get a federal tax deduction for the money you put into a 529, many states offer a state tax deduction for these contributions.
The big tax advantage is that no matter how much your investments grow between now and when you need the money, you won’t pay taxes on those gains, and any withdrawals you take out to pay for qualified education expenses will be tax-free.
5. Putting Estimated Tax Payments on Your Calendar
While this move won’t technically lower your taxes, it could help you avoid a higher than necessary tax bill at the end of the year.
That’s because Income tax in the United States works on a pay-as-you-go system. If you are a salaried employee, the federal government typically collects income taxes throughout the year via payroll taxes.
If you’re self-employed, however, it’s up to you to pay as you go. You can do this by paying the IRS taxes in quarterly installments throughout the year.
If you don’t pay enough, or if you miss a quarterly payment due date, you may have to pay a penalty to the IRS. The penalty amount depends on how late you paid and how much you underpaid.
The deadlines for quarterly estimated taxes are typically in mid-April, mid-July, mid-September, and mid-January.
For help calculating your estimated payments, individuals can use the Estimated Tax Worksheet from the IRS .
6. Saving Your Donation Receipts
You may be able to claim a deduction for donating to charities that are recognized by the IRS. So it’s a good idea to always get a receipt whenever you give, whether it’s cash, clothing and household items, or your old car.
If your total charitable contributions and other itemized deductions, including medical expenses, mortgage interest, and state and local taxes, are greater than your available standard deduction, you may wind up with a lower tax bill.
Note: For any contribution of $250 or more, you must obtain and keep a record.
7. Adding to Your HSA
If you have a high deductible health plan, you may be eligible for or already have a health savings account (HSA), where you can set aside funds for medical expenses.
HSA contributions are made with pre-tax dollars, so any money you put into an HSA is income the IRS will not be able to tax. And, you typically can add money until mid-April to deduct those contributions on the prior year’s taxes.
That’s important to know because HSA savings can be used for more than medical expenses. If you don’t end up needing the money to pay for healthcare, you can simply leave it in your HSA until retirement, at which point you can withdraw money from an HSA for any reason.
Some HSAs allow you to invest your funds, and in that case, the interest, dividends, and capital gains from an HSA are also nontaxable.
Recommended: How to Switch Banks
8. Making Student Loan Payments
You may be able to lower your tax bill by deducting up to $2,500 of student loan interest paid per year, even if you don’t itemize your deductions.
There are certain income requirements that must be met, however. The deduction is phased out when an individual’s income reaches certain thresholds.
Even so, it’s worth plugging in the numbers to see if you qualify.
9. Selling Off Poorly Performing Investments
If you have investments in your portfolio that have been down for quite some time and aren’t likely to recover, selling them at a loss might benefit you tax-wise.
The reason: You can use these losses to offset capital gains, which are profits earned from selling an investment for more than you purchased it for. If you profited from an investment that you held for one year or less, those gains can be highly taxed by the IRS.
This strategy, known as tax-loss harvesting, needs to be done within the tax year that you owe, and can help a taxpayer who has made money from investments avoid a large, unexpected tax bill.
The Takeaway
The key to saving on taxes is to get to know the tax code and make sure you’re taking advantage of all the deductions and credits you’re entitled to.
It can also be helpful to look at tax planning as a year-round activity. If you gradually make tax-friendly financial decisions like saving for retirement, college, and healthcare throughout the year, you could easily reduce your tax burden and potentially score a refund at the end of the year. If you do score a tax refund, you can put it to good use, paying down debt or earning interest in a bank account.
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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