Tax bracket

Avoiding Taxes - Investing in Stocks or Dummies

• Report rights infringement
• published: 13 Aug 2015
• views: 58

Go to http://www.BayStateProperty.com for MORE QUALITY Investing and Finance Videos just like this one! How to Avoid Taxes - Investing in Stocks for Dummies P 15 By Curtis L. Lyman AAA | Tax efficiency is essential to maximizing returns. Due to the complexities of both investing and U.S. tax laws, many investors don't understand how to manage their portfolio to minimize their tax burden. Simply put, tax efficiency is a measure of how much of an investment's return is left over after taxes are paid. The more that an investment relies on investment income - rather than a change in its price - to generate a return, the less tax-efficient it is to the investor. This article will detail common strategies for creating a more tax-efficient portfolio. It will discuss tools commonly overlooked by investors, which results in lower lifetime returns due to paying higher taxes. Taxable, Tax-Deferred and Tax-Exempt Accounts Before investors can take any steps toward tax-efficient investing, they must first determine how their accounts are structured under the law. Generally speaking, accounts can be taxable, tax deferred or tax exempt. For taxable accounts, investors must pay taxes on their investment income in the year it was received. Taxable accounts include individual and joint investment accounts, bank accounts and money market mutual funds. On the other hand, tax-deferred accounts shelter investments from taxes as long as they remain in the account. Any kind of retirement account - 401(k), IRA or Roth IRA - is a tax-deferred account. For tax-exempt accounts such as Canada's Tax-Free Savings Account, investors do not need to pay taxes even at withdrawal. Both types of savings accounts have their advantages and disadvantages. As a general rule of thumb, tax-efficient investments should be made in the taxable account, and investments that are not tax efficient should be made in a tax-deferred or tax-exempt account - if an investor has one. Know Your Bracket Next, an investor must consider the pros and cons of tax-efficient investing. First, the investor needs to determine his marginal income tax bracket and whether it is subject to the alternative minimum tax. The higher the marginal bracket rate, the more important tax-efficient investment planning becomes. An investor in a 39.6% tax bracket receives more benefit from tax efficiency on a relative basis than an investor in a 15% bracket. Once the investor identifies his bracket, he must be aware of the differences between taxes on current income and taxes on capital gains. Current income is usually taxable at the investor's bracket rate. Capital gains taxes are distinguished by being a gain and by being either short term (usually held less than one year) or long term (usually held more than one year). So you've decided to invest in the stock market. Congratulations! In his 2005 book "The Future for Investors," Jeremy Siegel showed that, in the long run, investing in stocks has handily outperformed investing in bonds, Treasury bills, gold or cash. In the short term, one or another asset may outperform stocks, but overall stocks have historically been the winning path. More from Investopedia: » Investing 101 » Stock Basics Tutorial » Introduction to Diversification But there are so many ways to invest in stocks. Individual stocks, mutual funds, index funds, ETFs, domestic, foreign - how can you decide what is right for you? This article will address several issues that you, as a new (or not-so-new) investor, might want to consider so that you can rest more easily while letting your money grow.