Show #352 Airing Sunday, 8/13/06
Your investment profits should mean money in the bank for you, not for Uncle Sam. But if you don’t play your cards right, the taxman might be taking you to the bank. Here with tips to save your profits from taxes is Tony Mercuri from Ta-Check Tax Service.
Question:Profits you make are especially ripe pickings for the taxman. Tony, you've made a list of ways to save taxes on profits. The first is Time your security sales for the lowest tax. What does that mean?
Answer: There is a huge difference between the tax on long-term capital gains and the tax on other income. Long-term rates can be as low as 5%, and when you sell stock/funds it can't be higher then 15%.
Short-term gains are taxed as regular income. This means that tax rates can be as high as 35%. That is at least a 20% difference.
Additionally, if you have some large gains, try to offset them with some long-term losses, thus wiping out much of the tax liability.
Question:Next on your list is Time your mutual fund buys carefully.
Answer: If you own a mutual fund, you are taxed on your share of any of the funds' gains. The fund only determines who owns the shares one time each year. This is called the date of record, or record date. If you own the fund that date, you pay tax on the whole year's gains, even if you only owned it a month. So be careful when you buy a fund near the end of the year. It may be better to wait a few days.
Question:Another suggestion is to Consider tax-free or tax-deferred investments.
Answer: Tax-free investments are best and may be appropriate depending on the type of performance for which you are looking. But tax-deferred investments do a great job also. You may be able to defer the taxes until after you retire (like an IRA), and at that point you are most likely in a lower tax bracket.
Question:Then Swap bonds.
Answer: If you have long-term bonds, their value has probably decreased with the rising interest rates. So it may be beneficial to sell your bonds and take a tax loss. Then, buy another similar bond with the same maturity, risk, and interest. Your portfolio won't change much, and you get a tax break.
Question:Next, Avoid wash sales.
Answer: If you sell a security for a loss and buy it back within 30 days, you cannot deduct the loss. Even if you bought the same security 30 days before you sold it for the loss you cannot deduct it. Technically, the loss amount is added to the basis of the new shares. So pay close attention to the calendar.
Question:Finally, Deduct investment expenses.
Answer: If you itemize your tax return, your investment expenses are deductible as miscellaneous expenses. This includes investment subscriptions, fees for advice, safe deposit box expense, custodial fees, and management fees.
I hope you've "profited" from Tony's tips on protecting profits from taxes. To learn more, give Ta-Check a call.
