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Investment Tax Strategies

11322953266_db29ce0659With marginal tax rates of up to 39.6%, taxes can seriously erode your investment’s total return.  Consider these strategies, which can help you reduce income taxes:

Consider your holding period before selling.  Gains on investments held for one year or longer are taxed at the capital gains tax rate of 15% or 20% (0% if you are in the 10% or 15% tax bracket), rather than ordinary income tax rates.  Thus, before selling an investment, review your holding period.

Review realized gains and losses before year-end.  If you have realized gains but are holding investments with losses, you might want to sell them before year-end to offset those gains.  You can offset all of your capital gains plus take an additional 3,000 of loss against ordinary income.

Specifically identify which shares you are selling.  If you purchased an investment over time, you may have varying basis amounts for different shares.  Your gain or loss will be determined by which shares you sell.  Thus, you should assess your overall tax situation, decide whether you want a higher or lower gain or loss, and then designate which shares you want to sell.

Donate investments with large capital gains to charitable organizations.  You can deduct the fair market value of the investment (provided you held it over one year) as a charitable contribution, subject to limitations based on your adjusted gross income.  By donating the investment, you do not pay capital gains taxed on the gain.

Keep track of your investments’ bases so you don’t overpay taxes.  For instance, reinvested dividends are part of your cost basis since income taxes were paid when the dividends were received.  For inherited assets, the cost basis is typically the value on the date of the previous owner’s death.

Consider tax-deferred or tax-exempt investments.  The interest income from municipal bonds is typically exempt from federal income taxes and possibly state and local income taxes. Contributions to 401(k) plans and IRAs can grow on a tax-deferred or tax-exempt (for Roth IRAs) basis.  This deferral of income taxes can make a significant difference in the ultimate size of your portfolio.

Please call if you’d like to discuss how to structure your portfolio in a more tax-efficient manner.

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