Taxes and investments often feel like they’re on opposite teams. You work hard to grow your money, but the tax bill arrives, taking a big chunk of your returns. The good news is that with some smart planning and sound professional advice, you can reduce the amount you pay in taxes and keep more of your money working for you.

Here’s a breakdown of nine easy-to-understand strategies to help you minimize your net investment income tax bill.

1. Choose Investments That Are Easy on Taxes

Not all investments are equally taxed. Some are more tax-efficient, meaning they won’t have as much impact on your taxes. For example, index funds and exchange-traded funds (ETFs) are generally more tax-friendly because they don’t trade as frequently as actively managed funds, resulting in fewer taxable gains.

Municipal bonds are another good choice because the interest you earn is usually tax-free at the federal level—and sometimes even at the state and local levels.

2. Use Tax-Advantaged Accounts

You may miss out on potential savings if you’re not using tax-advantaged accounts like IRAs and 401(k)s. These accounts allow your investments to grow without being taxed right away. For traditional IRAs and 401(k)s, you won’t pay taxes until you withdraw the money in retirement, which means you’re deferring those taxes and letting your investments grow tax-free for years.

Roth IRAs and Roth 401(k)s work a little differently. You pay taxes upfront, but your money grows tax-free, and you won’t owe any taxes when you withdraw it in retirement. 

Both options have their perks, and choosing the right one depends on your financial situation and goals. Remember that your eligibility for certain tax-advantaged accounts may depend on your modified adjusted gross income (MAGI), calculated by making specific adjustments to your adjusted gross income (AGI).

3. Hold On to Your Investments Longer

One of the easiest ways to avoid paying too much in taxes is by holding onto your investments. The IRS only taxes you when you sell an investment for a profit (capital gains tax). If you don’t sell, you don’t pay. It’s that simple. Plus, holding your investments for more than a year means you’ll pay a lower tax rate on your gains—long-term capital gains rates are generally lower than short-term ones.

This buy-and-hold strategy is a win-win because research shows it often leads to better returns over time. So, you’re not only saving on taxes, but you’re also likely growing your money more effectively.

4. Place Your Investments in the Right Accounts

Where you hold individual investments matters. Some investments are better suited for taxable accounts, while others should be kept in tax-advantaged accounts like IRAs or 401(k)s. For instance, investments that don’t generate much taxable income, like municipal bonds, are great for taxable accounts. On the flip side, investments that generate a lot of taxable income, like high-yield bonds, should be kept in tax-advantaged accounts where they can grow without being taxed yearly.

This strategy, known as asset location, can significantly affect how much of your gains you keep after taxes.

5. Offset Gains with Losses

Not all your investments will perform as well as you hoped. But there’s a silver lining—you can use those losses to your advantage. If you sell an investment at a loss, you can use that loss to offset gains from other investments, reducing your overall tax bill. This strategy is known as tax-loss harvesting.

If your losses exceed your gains, you can use up to $3,000 ($1,500 for single filers) to reduce your taxable income each year, with any additional losses carried over to future years.

6. Consider a Health Savings Account (HSA)

Opening an HSA can be a smart move if you have a high-deductible health plan. Contributions to an HSA are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are also tax-free. It’s a triple-tax advantage that’s hard to beat.

Plus, after you turn 65, you can use the money for non-medical expenses without a penalty—though you will pay taxes on those withdrawals, similar to a traditional IRA.

7. Give to Charity With Intention

If you’re charitably inclined, there are tax-efficient ways to donate. For example, you can donate appreciated stocks or mutual funds instead of selling them and donating cash. By doing this, you avoid paying capital gains taxes on the appreciation, and you can still claim the full market value of the donation as a tax deduction.

Another option is to use a donor-advised fund, which allows you to make a charitable donation, get an immediate tax deduction, and then decide later which charities will receive the money.

8. Consider a 1031 Exchange for Real Estate Investments

If you’re a real estate investor, a 1031 exchange can be helpful when it comes to managing your tax bill. This strategy allows you to defer paying capital gains taxes when you sell one investment property and use the proceeds to purchase another property of equal or greater value. Essentially, you’re rolling over your gains into a new investment without paying taxes immediately.

This is particularly useful if you’re looking to upgrade your portfolio—maybe you want to move from residential to commercial properties or into a different market altogether.

However, 1031 exchanges come with strict rules and timelines that must be followed to maintain your tax deferral. For example, you must identify the new property within 45 days of selling the old one and close on the new property within 180 days. It’s a powerful tool, but it’s not one to handle alone—working with a knowledgeable financial advisor can ensure you get it right.

9. Optimize Your Withdrawal Strategy

As you begin to use your investments, whether in retirement or otherwise, how you take out your funds can greatly affect your tax bill. It’s about how much you withdraw and from which accounts. For instance, taking money from a traditional IRA or 401(k) is taxable as ordinary income, so you’ll want to manage those withdrawals carefully to avoid bumping into a higher tax bracket.

Another strategy to consider is where your dividends, interest, and capital gains distributions go. If these are being automatically reinvested in your taxable accounts, you might pay taxes twice—once when the income is earned and again when you eventually sell the investment. Instead, you can direct these distributions to a money market account, where they won’t be subject to capital gains taxes when you withdraw them.

These withdrawal strategies might seem insignificant, but over time, they can make a big difference in how much of your investment returns you get to keep. As always, a financial advisor can help you tailor these strategies to your specific situation, ensuring you’re minimizing taxes and maximizing your long-term financial security.

The Aligned Perspective: Tax Efficient Investing

While these strategies can help you reduce your investment tax bill, the tax code is complicated and constantly changing. That’s where a financial advisor comes in. A good advisor can help you understand the complexities of tax-efficient investing, ensure your investment strategy aligns with your financial goals, and update you with the latest tax laws.

Investing is about making money, but it’s also about keeping it. By being smart with your taxes, you can ensure that more of your money stays where it belongs—in your pocket, working for you. So, take a proactive approach to your investments and consider partnering with a financial advisor to optimize your strategy.