Investment Strategies To Beat The Tax Man

by Ron Haynes

Rescuing your dwindling paycheck from the tax-man has become an important part of formulating an investment strategy, even if you are a rich politician.

1040 tax formRegardless what you were promised in 2013, your taxes will go up now that the “Bush” tax cuts have been allowed to expire. A recent article in Investor’s Business Daily outlined how those making far less than that magical $250,000 per year will see their taxes increase. Families making $50,000 per year will pay as much as an extra $835 per year.

Since tax rates will be rising regardless of your income, you can take steps to prepare. Here are a few strategies to consider in anticipation of the coming tax hike:

Before you panic, use a buy-and-hold investment approach

With an investment that increases in value by 6% each year, it will increase a little over 26% in four years, excluding any dividends or interest payments. So, although capital gain and other tax rates will increase next year, you may also want to consider holding investments with growth rates exceeding the increase in the tax rate. Buy-and-hold (excluding annual rebalancing of your portfolio) is one key factor in How A Second Grader Beats Wall Street.

Sell appreciated assets

Current long-term capital gains tax rates generally peak at 15%, but the rate is scheduled to increase to 20% after 2010. To avoid paying tax at the higher rate, consider selling those assets it makes sense to take advantage of today’s lower rates.

Collect all possible income in 2013

With tax rates scheduled to rise next year, it makes sense to collect as much income as possible this year.

  • If you’re self-employed, bill all your clients promptly. This could get a little dicey in December because your clients may want to pay in January to off-set their income. Consider offering a discount equal to the amount of extra tax you’d pay on that income.
  • If you have any nonqualified stock options, exercise them in 2013. The difference between the stock’s exercise price and its fair market value is considered ordinary income and is included in your W-2.
  • Ask your employer if you can receive your January bonus in December. Again, the company may prefer to pay it in January to offset its income.

Move investments to tax-free options

Certain types of investments provide tax-free income, tax-free growth, or aren’t taxed at all.

Municipal bonds and municipal bond funds can provide tax-free income

It can be tricky to calculate the real yield for a tax-free municipal bond because  of the tax you don’t have to pay. Just remember that interest on certain municipal bonds is subject to the Alternative Minimum Tax.

Education savings plans also have tax advantages

Certain qualified tuition plans (QTPs), or section 529 plans, and Coverdell Education Savings Accounts (ESAs) allow you to save funds for your children’s future education expenses. Although the contributions you make aren’t tax deductible on your federal return, the earnings grow tax free and distributions to pay for qualified education expenses are tax-free as well. QTP contributions may be eligible for state tax deductions or credits. Unfortunately, the recent health care bill passed by Congress cut the amount you can set aside in your Coverdell account by 75%.

A Roth IRA grows income tax free

Roth IRA contributions aren’t tax-deductible, but you’ll pay no income tax on qualifying withdrawals. Generally, withdrawals are qualified if you’ve had the Roth at least 5 years and you are at least 59½ years old. A Roth IRA has many parameters and limitations, so be sure you consult an accountant or tax professional.

Life insurance proceeds are not subject to income tax

Life insurance can be a great way to pass wealth to your heirs without the worry about income taxes. In fact, if a life insurance policy is held until the insured’s death, the proceeds aren’t taxable. If the policy was owned by a life insurance trust, it may be free from estate taxes (again, check with a tax professional).

Get some advice

These strategies can be complex, with many potential features and pitfalls. Your financial advisor can explain your choices and help you determine which ones are most appropriate for you.

About the author

Ron Haynes has written 988 articles on The Wisdom Journal.


The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.



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