6 Strategies for Tax-Efficient Investing

It’s tax season again and this often prompts a variety of feelings including procrastination and intimidation.  It’s no fun knowing that after factoring in federal income and capital gains taxes, the alternative minimum tax, and any applicable state and local taxes, your investments’ returns in any given year may be reduced significantly.

But for some people, tax time can actually be a very happy time.  That’s because they have put into place some effective strategies to decrease their income tax bite.

Here are several Strategies & Tips to potentially help lower your tax bill.

  1. Defer Taxes by Investing in Retirement Accounts. Among the biggest tax benefits available to most investors are the benefits offered by retirement savings accounts such as 401(k)s, 403(b)s, and IRAs. These accounts offer two tax advantages 1) the contributions you make may reduce your current taxable income and 2) any investment growth is tax deferred until withdrawal which is typically when you are retired and in a lower tax bracket.
  2. Don’t take early withdrawals. Withdrawals prior to age 59½ from a qualified retirement plan, IRA, Roth IRA, or annuity may be subject not only to ordinary income tax, but also to an additional 10% federal tax.
  3. Know the implication of the timing of your buy & sell.  If you sell a fund or security within one year of buying, any gain could be subject to short-term capital gains rates, currently as high as 39.6% at the federal level—and some high earners may be subject to the 3.8% Medicare surtax as well.  However, if you hold the assets for more than a year—the highest federal rate for long-term capital gains is 20%, plus an additional 3.8% if you are subject to the Medicare surtax.
  4. Consider Government and Municipal Bonds. The interest on U.S. government issues are subject to federal taxes but they are exempt from state taxes.  Municipal bond income is generally exempt from federal taxes, and municipal bonds issued in-state may be free of state and local taxes as well.
  5. Use your losses to your advantage. If your outlook on an investment has changed and you sell the asset at a loss, you may be able to use the loss to help offset realized gains.  Your realized capital losses in a given tax year must first be used to offset realized capital gains. If you have “leftover” capital losses, you can offset up to $3,000 against ordinary income. Any remainder can be carried forward to offset gains or income in future years, subject to certain limitations.
  6. Get individual tax advice especially if you are in the marginal bracket. If you are in the higher tax bracket (39.6%), the benefit of implementing tax-efficient strategies will be more beneficial to you than for an investor in the 15% bracket, so be sure to get the advice you need.

Keeping an eye on how taxes can affect your investments is one of the easiest ways you can enhance your returns over time.  I work closely with my clients to show them ways that we can manage their portfolio to minimize their tax burden.  If you would like to have a financial planning strategy session with me, book a time in my calendar.

Jerry Bergner, AAMS CMFC

* This information is general in nature and is not meant as tax advice. Always consult a qualified tax advisor for information as to how taxes may affect your particular situation.

Located in Durham, NC, Integrated Life and Financial Planning is an independent financial services firm founded by Jerry Bergner, AAMS CMFC. As a Durham, NC, Financial Planner, Jerry’s mission is to help you work toward the life YOU envision for yourself and those you care about. If you need help in clarifying that vision, he can work with you on that as well! Book a consultation meeting today.