Check Out Tax-advantaged Investments

Tax-advantaged investments can help diversify your portfolio and reduce your taxes. They come in several varieties.

• Tax-free investments escape federal, state, or local taxes. Examples include municipal bonds or U.S. Treasury bonds, and certain private activity bonds.
• Tax-deferred investments usually will be taxed at some time in the future, either when they are sold or when the accumulated funds are withdrawn. Examples include U.S. savings bonds, retirement accounts, and annuities.
• Tax-credit investments provide tax incentives to promote specific social causes identified by Congress. Tax credits generated from these investments reduce your tax bill dollar-for-dollar. Examples include investments in low-income housing or low-income community development.
• Tax-efficient investments minimize capital gain distributions in part by keeping investment turnover low. They include tax-managed funds, closed-end funds, and unit investment trusts.

When comparing investments, you should measure their after-tax return — the amount of earnings you keep after paying taxes. Let's compare a 6% tax-exempt municipal bond with a taxable corporate bond. To receive the same amount from a corporate bond, it would have to yield 7.1% for taxpayers in the 15% income tax bracket, 8.3% for those in the 27.5% tax bracket, 8.6% for those in the 30.5% tax bracket, 9.3% for those in the 35.5% tax bracket, and 9.9% for those in the 39.1% tax bracket.

The tax treatment of an investment isn't always what it seems. For example, tax-exempt interest can trigger both tax on your social security benefits and the alternative minimum tax. The result is that your investment isn't tax-free after all.

Understanding your tax-advantaged investment choices and their tax ramifications will help you build a well-diversified investment portfolio. If you have questions, please call us.

Related Information:
        Ideas and Information About Taxes
        Personal Financial Planning
        Review Your Mutual Funds
        Selecting a Tax Advisor
        Tax Services
        Treasury Offers New T-bill

© Copyright 2001 Raymond S. Kulzick. All rights reserved. 010805.