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Special Report Lighten Your Losses As most of you probably know, you can use up to $3,000 in losses to offset ordinary income. If you live in a high-tax state like New York, the tax savings can be 50% or more, which effectively cuts your losses in half. Moreover, if you’ve realized gains in the stock market during the year, you can offset those gains by realizing losses up to the full amount of the gains. It’s possible to do all of this and still maintain the character of your stock portfolio. True, the law bans “wash” sales, meaning you can’t sell something at a loss and turn around and buy it back. You have to wait 30 days, with attendant market risk, before buying the same security. But there are a few strategies that provide the same result. The most common is to buy an identical number of shares you wish to sell for tax purposes, wait 30 days, then sell the position. Under first-in, first-out (FIFO) accounting rules you’ve sold the shares you bought first, realized a tax loss and now hold an identical position. Note, however, that you’ll still have undergone a month of market risk when you doubled your position. This makes sense if you believe your stock will rise during the period. If you think it will fall, you should simply sell, wait 30 days, then buy it back. Bond Swapping Another technique for lowering your taxes involves your bond portfolio. Anyone who owns bonds that are trading below their amortized purchase price and who has capital gains or other income that could be partially, or fully, offset by a tax loss can benefit from tax swapping. The traditional tax swap involves two steps: (1) selling a bond that is worth less than you paid for it and (2) simultaneously purchasing a bond with similar, but not identical, characteristics. By swapping, you have converted a “paper” loss into a real loss that can be used to offset taxable gain. Capital losses from swap transactions are reflected on Schedule D of your tax return. If you have short-term or long-term capital gains, the losses from the swap transactions will offset these gains first-long-term losses will offset long-term gains, and short-term losses will offset short-term gains; net losses in either category will then offset gains in the other category. If the net result is an overall capital loss, the excess loss can be used to offset ordinary income dollar-for-dollar (up to a maximum of $3,000). If an investor has both net short-term and net long-term capital losses, the ordinary income is first offset by the short-term capital losses, then by the long-term losses. Excess capital losses can be carried forward indefinitely to reduce capital gains liability and ordinary income in future years. For more information concerning these tax planning measures, please contact a financial consultant at Glen Rauch Securities, Inc. 800-654-4000. Take Advantage of Bond Swapping and Reduce Your Taxes. Anyone who owns bonds that are selling below their amortized purchase price and who has capital gains or other income that could be partially, or fully, offset by a tax loss can benefit from bond swapping. You may have realized capital gains from the sale of a profitable capital asset (e.g., real estate, your business, stocks or other securities). By swapping those assets that are currently trading below the purchase price (due to rising interest rates) you can reduce or eliminate the capital gains tax you would otherwise have paid on your profitable transactions in the current tax year. Find out more about this "tax gift" by contacting a Glen Rauch Securities investment consultant at (800) 654-4000. Free booklets are available upon request. What are tax-exempt municipal bonds? Tax-exempt municipal bonds are debt obligations issued by states, cities, counties, and other governmental entities to raise money to build schools, highways, hospitals, and sewer systems, as well as many other projects for the public good. When you purchase a municipal bond, you are lending money to an issuer who promises to pay you a specified amount of interest (usually paid semiannually) and return the principal to you on a specific maturity date. An Investment for Today's Tax-Conscious Investor Tax-exempt municipal bonds are among the most popular types of investments available today, and with good reason. They offer a wide range of benefits, including:
The Advantage of Tax Exemption Under present federal income tax law, the interest income you receive from investing in municipal bonds is free from federal income taxes. In most states, interest income received from securities issued by governmental units within the state is also exempt from state and local taxes. In addition, interest income from securities issued by U.S. territories and possessions is exempt from federal, state, an local income taxes in all 50 states. Effect of Federal Income taxes on Yields of Tax-exempt and Taxable Instruments: |
6% 8%
TAX-EXEMPT TAXABLE
BOND INVESTMENT
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CASH INVESTMENT $30,000 $30,000
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INTEREST $ 1,800 $ 2,400
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FEDERAL INCOME TAX IN THE
36% MARGINAL TAX BRACKET 0 $ 864
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NET RETURN $ 1,800 $ 1,536
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YIELD ON INVESTMENT 6.0% 5.1%
AFTER TAXES
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Bonds with Special Investment Features
Insured municipal bonds. Many municipal bonds are backed by municipal bond insurance specifically designed to reduce investment risk. In the unlikely event of default, an insurance company which guarantees payment will send you both interest and principal when they are due. |
| TAXABLE INCOME | ||||||
| SINGLE RETURN | $0- $24,000 | $24,001- $58,150 | $58,151- $121,300 | $121,301- $263,750 | $263,751 & over | SAMPLE EFFECTIVE MARGINAL RATE FOR CERTAIN HIGH-INCOME TAXPAYERS |
| JOINT VENTURE | $0 - 40,100 | $40,101 - 96,900 | $96,901 - $147,700 | $147,700 - 263,750 | $263,751 & OVER | |
| TAX BRACKET | 15% | 28% | 31% | 36% | 39.6% | |
| TAX-EXEMPT YIELDS(%) | TAXABLE YIELD EQUIVALENTS(%) | |||||
| 3.5 | 4.12 | 4.86 | 5.07 | 5.47 | 5.79 | |
| 4.0 | 4.71 | 5.56 | 5.80 | 6.25 | 6.62 | |
| 4.5 | 5.29 | 6.25 | 6.52 | 7.03 | 7.45 | |
| 5.0 | 5.88 | 6.94 | 7.25 | 7.81 | 8.28 | |
| 5.5 | 6.47 | 7.64 | 7.97 | 8.59 | 9.11 | |
| 6.0 | 7.06 | 8.33 | 8.70 | 9.37 | 9.93 | |