3 Effective Tax Strategies for Investors

Tax efficiency is the measure of how much an investment’s return you keep after taxes. Knowing your tax bracket is a good starting point, however, today’s tax code is quite complex. Understanding the tax code rules, managing how you generate income, choosing your investments with an eye on taxable income generation and properly utilizing potential tax deductions can help you become more tax efficient.

In general, there are three major tax strategies that investors should consider when they are attempting to manage their federal income taxes.

Strategy #1: Managing Taxes

Choosing the most appropriate investments for your situation is always your best choice. When considering your investment plan it is always helpful to keep an eye on taxes.

For example, an investor can choose to place investments that generate the most taxable income in their tax-advantaged accounts.

Tax efficient investments like municipal bonds or stocks you hold for long periods of time could generate lower tax bills than taxable bonds. Managing taxes can potentially help investors save money.

Strategy #2: Deferring Taxes

A powerful strategy for many investors can be tax deferral.

In the investment world, "tax deferred" refers to investments on which applicable taxes (typically income taxes and capital gains taxes) are paid at a future date instead of in the period in which they are incurred.

One of the most popular forms of tax deferrals is the use of a retirement account. IRAs, 401(k)s, 403(b)s and SEP plans are some of the more common ways that investors save for retirement in a tax deferred account.

Strategy #3: Reducing Taxes

Tax deferred accounts and even tax efficient investments may reduce your tax bill, but they do not eliminate taxes.

There are a few strategies available to investors that potentially create income that generally do not generate federal taxes. The list includes certain municipal bonds, Roth IRAs and some college savings accounts.

Choosing the Right Tax Strategy

Placing investments in the most tax efficient account may sound complex, but sometimes the choices are easier.

For example, some assets like equities you hold for a long term (that qualify for capital gains treatment) or municipal bonds may generate smaller tax bills than taxable bonds that generate ordinary income.

You could consider holding those assets in a taxable account. While tax implications should not dictate your final decisions a qualified financial professional can keep you aware of their impact.

Currently, investors face a multi-dimensional tax system.

There are seven different Federal ordinary income tax brackets (10%, 15%, 25%, 28%, 33%, 35% and 39.6%), three different capital gains tax brackets (0%, 15% and 20%), a 3.8% net investment tax income tax (NIIT), Personal Exemption Phaseout (PEP) and Pease limitations.

Investors not considering the tax impacts of their financial decisions may end up keeping less than those who do.

Maximize Your Tax Savings with Chatterton & Associates

Many taxpayers do not look at the tax implications of their investment holdings.

If you spend some time up front thinking about tax planning, you can potentially maximize your opportunities and minimize your tax bill.

A skilled financial professional can help with this process. Knowledge, strong organization and proper planning can help you comply with the tax laws and at the same time could allow you to take advantage of tax saving options.

At Chatterton & Associates, our tax planners, wealth managers, and financial advisors collaborate under one roof to bring the most comprehensive advice and planning to helping achieve your goals.

This article is for informational purposes only. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a tax professional or financial professional. This article provided by APFA, Inc. © APFA Inc. 2017