|
2. SHORT-TERM GAINS, BIG TAX BITE The distinction between a long-term capital gain and a short-term gain remains important for investors in the top brackets, because tax rates continue to be far higher for the latter. Short-term gains are triggered by profits earned from a taxable investment held less than a year. They're taxed as ordinary income, like wages, and high earners now face higher income tax rates. Those in the top bracket now pay a steep 43.4 percent including the health care tax, up from 35 percent. That's nearly 20 cents on the dollar greater than what they pay on long-term gains. 3. MUNI BOND ADVANTAGE GROWS The rate also rises to 43.4 percent for income that top earners receive from taxable bonds, such as corporate bonds. As a result, those investors can realize a greater tax advantage than they could previously from investing in municipal bonds and muni funds, rather than in taxable bonds. Investors don't have to pay federal taxes on income from munis, which invest in local and state government bonds. Munis are also free of state taxes if they limit investments to the state where you live. So consider whether munis' tax advantages will offset the higher pretax returns you'd normally expect from investing in a taxable bond fund. Look at tax-equivalent yield. It tells how big of a return you'd need from a taxable investment to equal the return of a tax-free bond. 4. BACKLOG OF TAXABLE GAINS BUILDING UP Stocks have more than doubled since the market hit bottom in early 2009. That huge gain means there's a growing likelihood that investors will be hit with tax bills from capital gains. When fund managers sell investments that appreciated in value, they pass on the taxable gains to investors each year. Managers have been able to limit their investors' tax exposure in recent years by using losses incurred during the stock market meltdown of 2008 to offset gains. But that's no longer so easy, now that stocks have made such a sustained climb. Tax exposure is typically greater at funds that trade holdings frequently. It's an especially important consideration for wealthy investors, now that they're paying higher rates. One option is to choose funds with moderate to low portfolio turnover. A fund with a turnover ratio higher than 50 percent
-- meaning more than half the holdings changed hands in a year -- could be one to avoid. If you're investing in an actively managed fund, consider those using strategies to limit capital gains
-- they often call themselves "tax-managed" funds. It's not easy to sort out all the options on your own, so it might be worthwhile to seek professional help from a financial adviser. ___ Questions? Email investorinsight@ap.org.
[Associated
Press;
Copyright 2013 The Associated
Press. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
News | Sports | Business | Rural Review | Teaching & Learning | Home and Family | Tourism | Obituaries
Community |
Perspectives
|
Law & Courts |
Leisure Time
|
Spiritual Life |
Health & Fitness |
Teen Scene
Calendar
|
Letters to the Editor