Investment Updates
Build On Four Pillars Of Tax-Efficient Investing
Published Wednesday, March 27, 2013 at: 7:00 AM EDT
It’s not the rate of return you realize from investments that really matters—it’s how much you pocket after taxes. For instance, suppose you have $10,000 to invest and you’re in the 35% federal income tax bracket. If a taxable investment generates a 10% return, your $1,000 in earnings will be reduced to $650 after you pay Uncle Sam. Conversely, if you earn an 8% return on a tax-free $10,000 investment, you walk away with $800—or $150 more. And that doesn’t even count state income taxes.
That’s not to say you should sink all of your money into investments providing tax-free income, but it does make sense to be “tax-efficient.” That’s especially important in the wake of several new tax-law changes affecting upper-income investors.
Start by analyzing the current tax landscape. (We’ll limit the discussion here to federal income taxes.) The top tax rate on ordinary income is 39.6%, while the usual 15% tax rate on long-term capital gains and qualified dividends is 20% for investors in the top tax bracket. Also, a 3.8% Medicare surtax may apply to a portion of your “net investment income.” At the other end of the tax scale, the two lowest brackets are 10% and 15%, and investors in these tax brackets owe zero tax on long-term capital gains and qualified dividends.
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