Tax Wise Investing

[Danny]

What investment vehicles do you know of that minimize/avoid taxes/AMT when preservation of capital.is critical.

Also, if a particular year has put you into a high tax bracket - can putting money into a 1 year CD that pays the interest at maturity - a year when you are in a lower tax bracket be a viable choice or is the interest for the beginning year reported to the tax authorities?

[Gone4Good]

All the standard tax deferral investments will work . . . Muni bonds, non-dividend paying stocks, tax deferred accounts (IRA, 401(k), etc.).* You can defer taxes on I Bonds and US savings bonds too.*

I'm pretty sure you have to pay taxes on the accrual of zero coupon bonds, but you can probably skate by with a 1-year CD that pays interest at maturity.*

Also some muni bonds (specifically "Industrial Development Revenue Bonds") are subject to the AMT, so avoid those if the AMT is a concern.

[Danny]

Quote:

Originally Posted by 3 Yrs to Go All the standard tax deferral investments will work . . . Muni bonds, non-dividend paying stocks, tax deffered accounts (IRA, 401(k), etc.). You can defer taxes on I Bonds and US savings bonds too. I'm pretty sure you have to pay taxes on the accural of zero coupon bonds, but you can probably skate by with at 1-year CD that pays interest at maturity. Also some muni bonds (specifically "Industrial Development Revenue Bonds") are subject to the AMT, so avoid those if the AMT is a concern.

Thanks. I'm considering muni funds/CEFs but they've been correcting some and I'm wondering if munis will hold their value/return in the current investment environment.

Also, I wonder if long term capital gains and dividends are ignored by AMT

[Gone4Good]

Muni's have been correcting lately because interest rates are surging. They will react like other bonds to increasing interest rates (that is to say their market value will decline). If you don't want to bear the interest rate risk, stay in shorter duration bonds or money market funds. Muni money market funds are paying about 3% currently, which equates to about a 5% after tax rate at the highest federal and state brackets.

Long-term capital gains and qualified dividends are taxed at the 15% rate in the AMT calculation.

[Danny]

Quote:

Originally Posted by 3 Yrs to Go Muni's have been correcting lately because interest rates are surging. They will react like other bonds to increasing interest rates (that is to say their market value will decline). If you don't want to bear the interest rate risk, stay in shorter duration bonds or money market funds. Muni money market funds are paying about 3% currently, which equates to about a 5% after tax rate at the highest federal and state brackets. Long-term capital gains and qualified dividends are taxed at the 15% rate in the AMT calculation.

3 yrs - Yeah, I think Muni MMF would be something I can like at 3+%
L Cap Gains & Divs are at the 15% rate - but are they ignored by AMT
Thanks

[mathjak107]

unless the bond or muni fund is stated to be amt tax free theres a good chance at least part of it will be taxable..i was in the fidelity municipal money market and 50% was taxable.had i known i would have a large capital gain last year i would never have been in it.not only did i get a lower rate by a wide margin than a taxable fund by 1/2 was taxable anyway...yes all your long term gains and income will be hit with the amt penalty...to give you an idea of the jump up from 15% under the amt my total tax bill was a flat 17.5% when all was said and done on every dollar of taxable income.dont confuse a 15% tax rate that you normally get less all those deductions,exemptions and credits as well as tax free intrest on municipals to the flat 17.3 on every dollar..its about a 15,000 penalty on my income last year...11.5 % or so went to the city and state hear too,also flat rate

[mathjak107]

heres the exact numbers,i looked them up....

we were able to lower our taxes by filing married seperatley this year..since the capital gain was in my wifes name only on a business venture she is in it made sence.i realized if we filed jointly even my salary would be hit with the amt and since once you phase out all deductions married or single dosnt matter since amt is flat rate...so heres the actual numbers off my wifes 1040....she only works part time so her income is only around 15,000 or so.the rest is investments and the capital gain from the sale of the nyc co=ops....

total income 741,457
regular taxes 115,047
amt penealty adder 12,186
total taxes 127,233

the state and local was a killer and was another 77,000

[ESRBob]

Mathjak -
You're well on your way to ER with a year like that!

Dan Tien -- I thinkyou're still working, with all the emphasis on munis, but just an obvious reminder that one other idea for reducing taxes is just equity index ETFs. I think I have the following benefits clear now: They will distribute few or no capital gains from the sale of assets to meet redemptions, and being index funds there will be little buying and selling within the fund itself from changing the securities held, (which would trigger some capgains). Dividends would be Qualified, thus getting you a lower tax rate, and should be little or no interest.

[cute fuzzy bunny]

Any of the "tax managed" vanguard funds work for you? You'd need a holding period of 5 years+ to avoid paying an early withdrawal penalty.

[Danny]

Quote:

Originally Posted by ESRBob Dan Tien -- I thinkyou're still working, with all the emphasis on munis, but just an obvious reminder that one other idea for reducing taxes is just equity index ETFs. I think I have the following benefits clear now: They will distribute few or no capital gains from the sale of assets to meet redemptions, and being index funds there will be little buying and selling within the fund itself from changing the securities held, (which would trigger some capgains). Dividends would be Qualified, thus getting you a lower tax rate, and should be little or no interest.

Hey Bob -
I coming up to my 5 Yr mark of being ER - just will have more income than usual this year - have to invest the proceeds from a rental sale - want to avoid the higher brackets. I also got a little worried of late by the way the country is being run into the ground so found myself overly conservative with investments. This morning at Yoga I had a clear moment and realized I should put some into equities for the long term and not sweat the financial irreponsibility of the feds - that will postpone the tax bite and hopefully I will get LTCG treatment too. So, your response speaks my mind - ETFs - any that seem good candidates now? - also I have the following stocks on my investigate further list - BUD, CSCO, DELL, STX, MSFT, JNJ. I already own TGT & ALEX (Hawaiian - sugar cane, shipping & real estate).
If anyone feels moved to comment on those - to agree or argue me out of any of them or to offer any other suggestions for fairly conservative undervalued plays - please feel free to sally forth.

Fuzzy - I don't do well with investments that require a long hold period and penalties - I 've been buying CDs in my IRAs and find 3-6-9-12 months as far I will go.

[ESRBob]

Quote:

Originally Posted by DanTien Hey Bob - I coming up to my 5 Yr mark of being ER -

Should have known...
I don't have an ETF shopping list, but anything Vanguard does in an index seems to have a VIPER these days... Still you'll need to hold them longer than your normal if you want to dodge short term capgains. I agree equities are key holdings, but I like mine in funds and being a buy-and-hold type, I don't want to trade them.

Now what were you doing thinking about stocks during yoga class! Was it during savasana at the end of class? That's the one that always gets me. Lie down flat on my back, eyes closed, and start thinking about all the shoulda coulda woulda stuff. At least I don't think about stocks any more, though. Been there and don't wanna go back.

[Danny]

Quote:

Originally Posted by ESRBob Now what were you doing thinking about stocks during yoga class! Was it during savasana at the end of class? That's the one that always gets me. Lie down flat on my back, eyes closed, and start thinking about all the shoulda coulda woulda stuff. At least I don't think about stocks any more, though. Been there and don't wanna go back.

Exactly what happened - during savasana - the equity thought crepted in, I acknowledged it and it kept on coming back and I kept on acknowledging until I was clear on what I need to do...I think I'll always be active in the markets - helps to entertain my analytical mind

[ESRBob]

Ah, so you think stocks can be analyzed! Now I get it.

I spent so much time trying to figure stuff out with stocks, only to have my analysis blown up by events and random wierd developments which I decided it would have been impossible for an outsider to know or predict, that I guess I gave up on it. Sounds like you've had more successes than humiliations so it has remained fun for you. Rock and roll! Send your tips out -- I'll bet there are a few people here who'd like to hear them? (Heh Heh heh heh heh heh!) Especially if they pay good dividends...

[Danny]

Quote:

Originally Posted by ESRBob Ah, so you think stocks can be analyzed! Now I get it. I spent so much time trying to figure stuff out with stocks, only to have my analysis blown up by events and random wierd developments which I decided it would have been impossible for an outsider to know or predict, that I guess I gave up on it. Sounds like you've had more successes than humiliations so it has remained fun for you. Rock and roll! Send your tips out -- I'll bet there are a few people here who'd like to hear them? (Heh Heh heh heh heh heh!) Especially if they pay good dividends...

Its a curse I have learned to live with! I don't know why God wired me this way, god knows...
I prefer to invest in what I know - I like to pick apart companies and try to find value and hold for the long term. I've been invested in Target since 1995 and ALEX since 1975 - both former employers. I've know the management over the years and these companies are very well run conservative outfits. I've had my failures, but yes I've know some successes, of course in the 90's you really had to work hard in order to fail!
I'm looking at Harley Davidson right now - any company I invest in I circle around it for a while until I get comfortable - I'm not sure about them yet, But I know they are an iconic american company that can not be duplicated by say the Chinese - its one of those companies that have a rapid religious following - kinda of like Dairy Queen in Minnesota

[sgeeeee]

Quote:

Originally Posted by DanTien What investment vehicles do you know of that minimize/avoid taxes/AMT when preservation of capital.is critical.

Anything that loses money. Is that helpful?

[sgeeeee]

Quote:

Originally Posted by DanTien What investment vehicles do you know of that minimize/avoid taxes/AMT when preservation of capital.is critical.

Anything that loses money. *Is that helpful? *

[Danny]

Quote:

Originally Posted by sgeeeee I'm hurt. There is a useful message in my little joke. The primary goal of our investments has to be to earn a good return. Tax optimization helps, but a lot of people become obsessed with tax reduction and forget about the value of earning high returns. I'm not suggesting that's what you were trying to do. But I was only trying to provide a little levity.

I didn't write that honestly!
I'm dumbfounded and I don't now know where that came from. Anyone that has followed my posts knows that I wouldn't treat anyone that way!

[ESRBob]

Dan,
Re: Harley Davidson -- have you figured out that in order to really understand the potential investment you need to buy yourself a road hawg and get out for rides on occasion with the gang? Now that's my idea of stock research!

[Danny]

Bob - that is excellent advice!

[Martha]

In 2004 I had significant earned income, and we had some interest income taxed at ordinary income rates. We also had some large capital gains. AMT hit hard.

In 2005 my earned income was about 1/3 of the prior year's, our interest income was a bit higher. Again, a large capital gain. However, because we had less income taxed at ordinary income rates, we paid less in on AMT, about $5500.

Large long term capital gains can trip you over into AMT land, even though those gains are still taxed at the 15% rate. This is because the gains can eliminate your AMT deduction and expose more, if not all, of your ordinary income to tax at the AMT rate.

If you want more AMT info, there are a couple of recent threads that talk quite a bit about it.