Continuation: 32 (20 to 25) Fool-Proof Federal Income-Tax-Saving Strategies
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20. Consider tax-exempt securities. Income from municipal bonds is free from federal taxes. Better still, invest in municipal bonds issued in your own state and you can save state and perhaps local taxes as well as federal taxes. Focus on after-tax yield when comparing the returns on different income investments. For example, if you are in the 31% bracket, a municipal bond paying 5% is equivalent to a taxable investment earning 7.25% (see “How to Boost your Savings”). Seniors may pocket even more tax savings from municipals. Although tax-free interest counts when figuring how much of your Social Security benefits are taxable, the lower yields on tax-exempts will hold down on the extra tax.
21. Round up all mutual fund transactions. To avoid getting socked by the IRS with a negligence penalty, carefully review all the Forms 1099-B you received from your mutual funds during the year. You may have more gains or losses than you think. You also incur gains or losses each time you pick up the phone and switch from, say, a stock fund to a bond fund in the same fund family.
22. Don’t overstate mutual fund capital gains. If you calculate the tax basis (the cost on which your capital gain or loss is based) of your mutual fund shares and come up with a round number like $10,000, you’ve probably erred in Uncle Sam’s favor. You likely forgot that your dividends and capital gains distributions were automatically reinvested in new shares. Because you have reported those amount as income in prior years, you will wind up paying taxes on them twice if you don’t add the reinvestments to your basis. Here’s how to figure your taxable gain: First, start with your original purchase price. Then, add together any amounts the fund reported to you during the year as undistributed capital gains and ordinary income dividends. Next, subtract any nontaxable dividends that represented a return of your investment. The result is your basis. Subtract that figure from the sale price. Viola! Your taxable gain. Read the rest of this entry »
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By some estimates, the average American household now pays 40% of its income in federal, state, and local taxes. This means should you fit that description:
Sooner or later, you’ll need a lawyer. In fact, you’ll most likely wind up needing more than one lawyer –one for the real estate closings and routine matters such as reviewing contracts and another for estate matters like wills and trusts. If your marriage sours, you may need a divorce lawyer. You might even hire a tax lawyer if you find yourself in a serious fight with the IRS or you’re about to sign a business deal with significant tax implications.
If all you need is an adviser to help you invest and you’ve got plenty of bucks, you might want to hire a money manager. Usually, money managers require at least $100,000 (sometimes far more) to invest, though some will take $50,000. The advantage of using one of the nation’s 8,000 money managers rather than just buying professionally managed mutual funds on your own is that you more control over how your cash is invested. For instance, you could tell the money manager not to buy certain types of stocks for you, such as tobacco companies. This brain won’t come cheaply, though. Many money managers charge 3% of the amount you invest, which is more than twice the fee of an average stock mutual fund.