Archive for the ‘Taxes’ Category

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Retirement: Pre-tax Savings

Wednesday, August 2nd, 2006

Another important aspect of investing in your retirement is tax-deferred plans are allowed to be deducted from your paycheck before the goverment takes out any taxes. Pre-tax contributions to a retirement plan will often reduce the amount of taxes you pay each year.

The government wants to encourage citizens to invest in their retirement and this is a main reason why you can make pre-tax contributions to your qualified reirement plan. This benefit might increase the amount of money you keep after taxes and savings are considered.

An example of this benefit would be to assume you make $75,000 annually and you set aside 8% of your pre-tax wages per year for retirement. Another earning the same amount and same contribution contributes 8% of pre-tax wages per year to a 401k plan at work. Both invest the same, but the pre-tax investor will tax home earnings of almost $2,000 more a year.

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Stocks, Bonds, Treasury Bills and Taxes

Tuesday, August 1st, 2006

As you might guess, taxes have a major impact on the overall perfromance of an investment portfolio. Stocks are one of the few asset classes that has provided significant after-tax growth from 1925-2000.

Examing returns after-taxes is a humbling experience because your winners do not seem as good as they did before you accounted for taxes. In this time period investments after taxes for stocks were 8.5%; Municipal bonds (exempt from federal taxes) 4.2%; government bonds 3.8%; and Treasury bills at 2.2%. Remember, inflation in this time period was 3.1%, so when that is added to the equation the results are even more somber. After taxes and inflation you actually lose money in treasury bills. Government and municipal bonds bareful outpace inflation. Finalyy, you will see that stocks will give you 5.4% after taxes and inflation.

So if you want your portfolio to grow over time bonds can help in diversification, but hurt you in performance.

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Capital Gains Tax

Sunday, July 2nd, 2006

Whether you know it or not gains on stocks, mutual funds, and even a house are all subject to capital gains tax.

If your capital makes money between the time you acquired it and when it is sold you will need to pay capital gains tax. The tax depends on several variables and criteria such as: how long you have owned the asset and the type of property you own. You never pay any capital gains taxes on it is actually sold for a profit.

Capital gains tax rates depend on how long you have owned an asset. If you have owned the asset for less than a year, capital gains would be taxed at the same rate as ordinary income. However, tax rates on income obtained from the sale of assets owned for more than a year can be as little as 5%.

In 1997 the federal government passed the “Taxpayers Relief Act” which almost eliminates capital gains taxes on home sales.

Currently, you can make up to $250,000 profit if you are a single owner, $500,000 if you are married, without having to pay capital gains on profits.

Rules for the Capital Gains Tax

  • The house being sold must be your principle residence. You have to have lived in the house for 2 of the last 5 years, but it does not have to be sequential.
  • You can only get free capital gains sale every two years.

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Alternative Minimum Tax

Sunday, June 18th, 2006

The AMT, or Alternative Minimum Tax, is a tax lottery you do not want to win. Studies show that within the next few years a significant percentage of American taxpayers will fall under the criteria to pay AMT. Congress created it in the 1960s to prevent the rich from getting away without paying any taxes. The problem is that is has not been adjusted for inflation and it has begun affecting more middle-class people. When Congress passed the Tax increase Prevention and Reconciliation Act (TIPRA) this had provisions to reduce the odds that more Americans would be caught in the Alternative Minimum trap in 2006 . . . but there is always 2007.

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Long-term Capital Gains Rates

Sunday, June 18th, 2006

The latest tax bill this year has extended through 2010 an excellent rate structure for long-term capital gains for investment assets held over 1 year as well as dividends. The highest rate of taxation on capital gains will stay at 15% through 2010. Individuals in low tax brackets (10% and 15%) will continue to get the 5% rate on capital gains through 2007 and then go to 0% from 2008-2010. So things have not changed much with long-term capital gains except in lower taxes brackets, but it is good to know this information when trying to understand your investments.

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Investment Loss Harvesting for Tax Purposes

Monday, May 29th, 2006

Every autumn you need to think about loss harvesting in your non-retirement taxable investment accounts. You can use up to $3,000 per tax year as losses to offset capital gains and this can make a bad invesment into a tax break.

Now if you lost $9,000 on taxable investments in a year you can take up to $3,000 of that and use it over three tax years. Therefore, a really bad investment can help you out for several tax years.

If you still like the investment you lost money in remember to follow the thirty-day wash rule because otherwise use cannot use the tax benefits of that loss.

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Flexible Spending Accounts

Monday, May 29th, 2006

If your job offers a Flexible Spending Account you should take advantage of it. It lowers your taxable income and is withdrawn directly from your paycheck and you use it to pay for a wide range of medical expenses. You can save around 30% on the amount you take out for the Flexible Spending Account. The limit is $5,000 and sign up is usually the autumn prior to the calendar year the money will be used.

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Mutual Fund Fees and Taxes

Sunday, May 21st, 2006

If you own mutual funds as a straight investment (not in a retirement account) you need to watch out for fees and taxes because they can really lower the overall performance of your mutual fund. As discussed before you want to avoid any fund with a load on it. In today’s mutual funds there is no reason to pay a fron or back load on any mutual fund because there are thousands of good/great no load mutual funds available.

Next look out for the expense ratio. Rarely should you ever consider a mutual fund with an expense ratio over 1.5%. Depending on the difficulty of the type of investing the mutual fund does the higher that fee will be. Sometimes big mutual funds might be your best bet here because they often will typically have lower expense ratios because they are huge companies and it costs them less to run their mutual fund.
12b-1 fees can exist as well so look at your mutual fund prospectus to find out if they are applicable.
Capital gains occur when the fund manager sells any stock in the portfolio for a gain. This can be offset by any losses during that same year. So look at how actively the fund is traded (turnover).

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W-4 Calculator

Friday, April 28th, 2006

If you want to reduce the amount you get back from the IRS at taxtime try their W-4 Calculator. Have at least a few recent paychecks and your tax return from the year prior to obtain accurate information. The calculator is surprisingly accurate and will typically be within $100.

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Taxes

Wednesday, April 26th, 2006

I am not an accountant, but I know a few things that can be helpful.

Do not think of tax time as when you should be getting money back from the government. The one thing most people will look forward to during tax season if their big return they will be getting. If you are getting money back from the government that is the equivalent of you paying more taxes than you should. This is true because you allowed the government to withhold too much money from your paycheck. The government then got to keep that money for an extended period of time without paying you interest on it.

So . . .

> If you received a lot of money back this year check with your Human Resource person to change your withholding number
> The lower the number your fill out on your W-4 form the more money the government will withhold from you paycheck
> The higher the number on your W-4 the more money you get in your paycheck. Make sure to remember you might owe
money come April 15
> If you know you will get money back do your taxes ASAP so you get your check ASAP
> If you know you have to pay you should wait as long as possible to pay (April 15 unless it is on the weekend or you get
an extension)

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