Invest for Success — Make Taxes a Year-Round Investment Priority

You may only think about taxes during the spring, but keeping them in mind throughout the year could be the key to helping to reduce your tax burden. Consider these tax issues when planning investment strategies.

Think long-term when investing — Profits on investments sold after being held for less than a year — known as short-term capital gains — are subject to ordinary federal income tax rates which run as high as 35%. Profits on assets held for at least one year are long-term capital gains, which are usually taxed at a maximum of 15%.

Defer taxes when possible — Consider contributing the maximum amount to an employer-sponsored retirement plan or a traditional IRA. Any earnings will potentially compound on a tax-deferred basis. That is, you’ll pay no taxes on earnings until you begin making withdrawals, typically during your retirement years when you may be in a lower tax bracket. Withdrawals prior to age 59 1/2 may be subject to 10% penalty tax.

Eliminate taxes — Investing in municipal bonds or opening Roth IRAs may be good options for some tax-averse investors. Income from municipal bonds may be exempt from federal, and in some cases, state and local taxes. Income may be subject to the alternative minimum tax. Although money contributed to a Roth IRA is not tax-deductible, you may not pay taxes on the contributions and earnings when you withdraw them if you meet certain qualifications.

Make losses work for you — Capital losses that exceed your capital gains may be deducted from your taxes, up to $3,000. Remaining losses can be carried over to offset gains the next year. Keep this in mind if you plan to sell assets.

Keep careful records — Organize your tax records now and update them throughout the year. This is especially important when claiming deductions on your tax returns. Most transaction records should be kept for three years, although some information — such as major home improvement records — should be kept longer.

Tax rules can be complex. Consult a tax professional before making decisions that could affect your tax situation.

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