Four Tips for Tax-Savvy Investors

Cindy Shively

A century ago, author Mark Twain wrote that the difference between a taxidermist and a tax collector is that the taxidermist only takes your skin. Today, the IRS isn’t any more popular. Why not see if any of the following strategies could allow you to keep more of what your investments earn?

1. Look into tax-managed mutual funds. Portfolio managers of tax-managed funds can use a number of strategies to help reduce the tax bite shareholders suffer. For example, they may strive to keep portfolio turnover low to help minimize taxable gains, or they may actively use losses to offset taxable gains.

2. Consider municipal bonds and bond funds. Because the interest on a municipal bond is usually exempt from federal taxes, and sometimes state and local taxes, it may actually produce a better yield than a taxable bond with a comparable interest rate. The higher your income tax bracket, the more you may benefit from owning “munis.”1

3. Contribute to tax-advantaged retirement vehicles. You can now contribute up to $5,000 annually to an IRA plus an additional $1,000 per year if you’re over age 50 (for the 2010 tax year). Traditional IRAs offer tax deferral — you pay no taxes on earnings until withdrawal — and may provide tax deductions. Roth IRAs offer tax deferral and qualified withdrawals are tax free, but no tax deductions.2

4. Use gains — and losses — to your advantage. If you have an investment and hold it for at least one year before selling, you’ll pay a maximum federal tax of 15% on capital gains. The same rate applies for dividend income.3 Keep it for less than one year and you’ll pay regular income taxes — up to 35%. Also keep in mind that if you intend to sell investments that have lost money, you can do so by December 31 and deduct up to $3,000 in investment losses from that year’s tax return. Additional losses can be carried over and used to offset future capital gains.

If you’d like to learn more, please contact Cindy Shively at 540-983-4912 or toll free at 877-449-4449 or on the web at http://fa.smithbarney.com/meridiangroupsb/  

There are other tax strategies you can use, but be sure to consult your tax professional and investment professional before acting.

1Income may be subject to the alternative minimum tax. Capital gains, if any, are subject to taxes.2Withdrawals before age 59½ are subject to a penalty tax. Each type of IRA has respective income limits as well as deductibility rules.3Lower rates apply for long-term capital gains and dividends for taxpayers who are in lower tax brackets.

Tax laws are complex and subject to change.  Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Smith Barney Financial Advisors do not provide tax or legal advice. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their personal tax or legal advisors to understand the tax and related consequences of any actions or investments described herein.

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