Tax-tical Advice & Key Tax Dates

Income TaxesWhen it comes to investment decisions, taxes should never be the deciding factor. But a smart investor looks to minimize taxes wherever possible.

Some Background:

The following is a refresher on some basic tax and investing facts:

Generally, taxpayers may hold their investments in two types of accounts — taxable accounts, such as brokerage accounts, and tax-deferred accounts, such as an individual retirement account or a 401(k).

Bond interest is generally taxed at ordinary rates unless the investment is held in a tax-deferred account. The ordinary rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. A major exception is municipal bond interest, which is generally tax exempt.

Taxable capital gains are subject to lower rates if the gains are considered “long term” (generally, securities were held longer than one year). For most taxpayers, the long-term capital gains rate is 15%. For those in the 39.6% ordinary tax bracket, the rate is 20%; for those in the 10% or 15% brackets, the rate is 0% (gains are not taxed).

The same long-term capital gains rates apply to qualified dividends.

Capital gains on securities held one year or less (“short term”) are taxed at ordinary rates.

High-income investors may have to pay an additional 3.8% net investment income tax.

Withdrawals from tax-deferred accounts are generally taxed at ordinary rates, even if the withdrawn funds represent long-term capital gains or qualified dividends.

There are several tax strategies you can use to minimize taxes on investments.

Maximize retirement contributions to tax-deferred accounts. By making tax-deductible or pretax contributions to IRAs or employer-sponsored retirement plan accounts, you delay the payment of income taxes. Investing the tax savings can boost returns.

Minimize turnover. Constant trading of securities within a taxable account turns unrealized (“paper”) gains and losses into realized gains and losses that are reportable for tax purposes. One way to minimize turnover is to avoid frequent trading. Another is to avoid mutual funds with high turnover ratios. Certain funds trade more frequently than others, and at the end of the year, they may distribute more taxable capital gains to their shareholders. Passively managed index funds trade relatively infrequently and tend to have lower tax costs.

Compare yields. Before choosing tax-exempt bonds, calculate whether they make sense for you. To determine how the yield on a taxable bond compares to the yield on a tax-exempt bond, subtract your marginal tax rate from one and divide the result into the yield on the tax-exempt bond.

Example. Laura is in the 33% federal income-tax bracket. She wants to know how much a taxable corporate bond would have to yield to match the 1.75% yield offered on a tax-exempt bond. She subtracts .33 from one and divides the result (.67) into 1.75% to arrive at 2.6%. Therefore, a taxable bond at that rate or above generally would be preferable.

Generally, the yield differentials between taxable and tax-exempt bonds make tax-exempts more suitable for higher bracket taxpayers.

Asset allocation. Because higher tax rates point toward tax deferral, a logical strategy is placing assets that are taxed at relatively low rates in taxable accounts and assets taxed at higher rates in tax-deferred accounts.


15 Individuals: Pay last installment of 2014 estimated tax with Form 1040-ES. Or file 2014 income-tax return and make full payment of any balance due by February 2, 2015.

2 Employers: Distribute copies of Form W-2 for 2014 to employees.

2 Businesses: Distribute Forms 1099 (or other information statements) to recipients of certain payments made in 2014. See us for more details.

2 Employers: File Form 941, Employer’s Quarterly Federal Tax Return; quarterly deposit due.

2 Employers: File Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for 2014.

10 Employers: Deferred due date of Forms 940 and 941, if timely deposits were made.
17 Businesses: Distribute Forms 1099-B, 1099-S, and certain Forms 1099-MISC to recipients of specified payments made in 2014. See us for more details.

2 Businesses: File 2014 Forms 1099 with the IRS. Electronic filers have until March 31 to file.

2 Employers: Paper filers must file 2014 Forms W-2 (together with transmittal Form W-3) with the Social Security Administration. Electronic filers have until
March 31 to file.

16 Corporations: Calendar-year corporations file their 2014 tax returns (Form 1120) and pay any taxes due.
S corporations file Form 1120S. For an automatic filing extension, file Form 7004 and deposit the estimated tax due.

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