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Natural Awakenings Washington DC Metro

Tis The Season for the Tax Man: Investment Tax Basics

by Jeremy A. Pearce and Barry Wind
One April 15 in the 1990s, a car rental company gave all its agents t-shirts that read, “I love the IRS” on the front and “Like I love slamming my fingers in the car door,” on the back. For better or worse, most folks start paying more attention to their taxes at this time of the year.

Fortunately, there are strategies you can implement year-round that will minimize your tax burden and keep more money in your pocket. This is particularly the case if you have brokerage or other taxable accounts. Just to be clear, your investments must, first and foremost, be suitable for your particular circumstances, e.g., your risk tolerance, time horizon and objectives. It should also be noted that it is generally more daunting to withstand losses from poor investment choices than it is to pay higher taxes on winning stock picks.

Yet, there are ways one can invest successfully while taking steps to minimize the impact of the taxman. So before you begin making investment choices, it is often prudent to be sensitive to tax liabilities. For example, using exchange traded funds (ETFs), passively managed index funds and low-turnover stock funds can reduce your exposure to capital gain distributions. There is also a category of mutual funds which were specifically created and are managed to minimize the tax burden of their investors.

For investors who own individual stocks, selecting those companies that are geared more toward growth and less toward dividends can help to avoid tax consequences that come with higher dividend payouts. If in a higher tax bracket, income from dividends can have a tax rate of up to 20 percent. Of course, with both mutual funds and individual stock holdings, investments held for longer than a year are taxed at the lower long-term capital gains rate instead of at the higher short-term gains rate.

Interest earned from corporate bonds in taxable accounts are subject to an investor’s ordinary income tax rate. One method to mitigate these high tax rates is to utilize the tax-advantaged investment option provided by municipal bonds and municipal bond funds. These are fixed income securities issued by states and municipalities that are generally shielded from Federal income tax (and in some cases free of state taxes as well). In addition, municipal bonds can add a layer of diversification to your portfolio.

Tax-loss harvesting is another approach which seeks to minimize your tax liability by offsetting realized capital gains with corresponding capital losses. Be careful, however, and steer clear of repurchasing the same or similar security within 30 days, lest you feel the wrath of the IRS “wash sale” rule.

Lastly, it may make sense to balance taxable accounts with tax-advantaged accounts, such as traditional and Roth IRAs, 401(k) retirement plans and annuities. Enrolling in and making contributions to your workplace retirement plan is a great way to save on taxes as well as get a start on your retirement. If you do not have a retirement plan at work, opening up a Roth or traditional individual retirement account (IRA) offers many of the same tax advantages. For the 2016 tax year, you can open and make contributions to an IRA by Tax Day, April 18, 2017.

As Tax Day approaches, we all know there is no way to completely avoid paying our share to the government. Wise investors, however, can start to take the steps that can minimize the bite for this year and the years to come.

Barry Wind and Jeremy A. Pearce are financial advisors in the Washington, D.C., area, specializing in socially responsible investing with SharePower Responsible Investing, Inc. Comments and questions can be sent to [email protected] and [email protected] 

Investing involves risk including loss of principal. Different types of investments carry varying degrees of risk and clients and prospective clients should be prepared to bear investment and original principal loss. Investing, including socially responsible investing, does not guarantee any amount of success. 

This is neither an offer to sell nor a solicitation of an offer to buy. The offering is only made by the prospectus. Investors should consider the investment objectives, risks, and charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. Prospectuses may be obtained from your advisor and should be read in full.

Securities offered through Cambridge Investment Research, Inc. member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and SharePower Responsible Investing, Inc. are not affiliated.

The information does not constitute and is not intended to be a substitute for specific individualized tax or legal advice. Where specific advice is necessary or appropriate, the authors recommend consultation with a qualified tax advisor, CPA or lawyer.


July 2021


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