It may be too late to save money on your taxes for the current year but it is not too late to save money on next year’s taxes. One of the ways in which you can lower your tax burden is by buying tax smart investments. Tax-efficient investments offer the greatest return on your money while reducing the income taxes owed.
Here are a few tax efficient investments. Municipal Bonds
Municipal bonds are bonds that are issued by city, state, and local governments. Municipal bonds are popular with lots of high net worth investors who are trying to lower their overall tax burdens. These bonds are attractive because they are free from federal income taxes. The rate may be lower than a corporate bond but the tax free aspect can make them a better choice than some bonds. Some municipal bonds are even exempt from state and local taxes.
Everyone knows that savings bonds can be good investments because they are guaranteed by the United States Federal Government. Savings bonds are tax efficient investments because the bonds are exempt from all state and local taxes. The bonds are only subject to state taxes if they are passed on as part of an inheritance or estate. Savings bonds are even exempt from federal taxes when they are used to pay for educational expenses. That is like getting interest tax-free.
Tax Managed Funds
Tax managed funds are specifically designed to minimize the amount of taxes that the fund holder pays. Tax managed funds keep portfolio turnover to a minimum so that investors will have to pay as little capital gains taxes as possible. These funds seek to avoid investing for the purpose of accruing any dividend and interest income. Tax managed funds seek long term growth of capital.
Index funds are often touted for their low fees but they are winners for another reason too. Index funds do a good job of minimizing portfolio taxes because the funds hold onto most of its stocks during the year. Index funds only re-balance when a stock is added to or dropped out of a particular index.
These are a few of the most tax efficient options that are available to investors. Investors should take the time to look at each particular asset and see how it works with their financial position and investment goals.
Mark Riddix is the founder and president of New Horizons Financial Management, an independent investment advisory firm that provides personalized investing and asset management consulting. Mark is a regular contributor to Seeking Alpha and has written financial columns for Baltimore and Washington, D.C. area newspapers. Mark publishes his own financial blog, BuylikeBuffett.com and has written the book Your Financial Playbook.