Tips to Tax Efficient Investing

Investing, in general, and US Tax laws don’t make it easy to maximize returns. This is precisely the reason why many tax investors do not know how to reduce the tax that they have to pay every year.

But if you did know more about tax efficiency, this can help you increase the bottom line of your investments once you have paid your taxes.

So here are a few tips that can help you to become tax efficient:

#1: Knowing your tax bracket

Determining the marginal income tax bracket is probably the first thing that you should do while also being aware of whether your portfolio is subject to alternative minimum tax. What investors should also keep in mind is that the higher the tax bracket, the more important tax efficiency becomes because an investor with 35 % in a tax bracket benefits more than an investor in the 15 % bracket. Another thing to keep in mind is that investors should know the difference between income tax and tax on capital gains.

#2: Avoiding tax-inefficient investments

Junk bonds, straight preferred and convertible preferred stocks are tax-inefficient investments and all these types of investments are taxable at the income tax rate, and the reason for this is because they are short-term capital gains investments.

#3: Choosing tax-efficient investments

Convertible bonds, investment-grade corporate bonds, common stocks, convertible subordinate notes and real estate investment trusts are examples of tax-efficient investments, and cause investors to pay little or no taxes even though the returns might not be as high as tax-inefficient investments.