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Mary Caroll Murphy
Wednesday, April 11, 2012

Key considerations for investors this tax season

Mary Carroll Murphy

EDITOR’S NOTE: Mary Carroll Murphy is a Nashua-based independent branch leader with Charles Schwab. Her new column featuring investing advice and news will appear the second Wednesday of the month in the business section.

Tax Freedom Day for most Americans this year is April 17 – four days later than 2011 due to higher federal income and corporate taxes. This means that 107 days, or almost 30 percent of a typical year, is spent working just to pay taxes, according to the Tax Foundation. That’s more than 15 weeks. Ouch!

Unfortunately, our state motto “Live Free or Die” doesn’t exempt us from having to pay local, state and federal taxes.

Consequently, there is an obvious benefit to becoming tax-savvy and lowering our overall tax burden as much as possible.

Here are some key considerations for investors to keep in mind when it comes to taxes.

Year-round approach

It would be wise to take a year-round approach to tax planning. Reviewing last year’s return can be a good place to start in identifying opportunities to save taxes this year and in the future:

If you are receiving a large refund or, on the other hand, you owe taxes, consider adjusting your withholding or quarterly estimated tax payments to make sure you’re not paying too much or too little.

Consider making your current-year IRA contribution and/or contributing to an Education Savings Account earlier rather than later if you feel confident about your projected income. Keep in mind that the earlier you make a contribution, the longer the power of compounding and tax-deferrals are working in your favor.

Evaluate whether you would benefit from tax-efficient investments, such as municipal bonds or securities that pay qualified dividends in taxable accounts.

Consider using capital losses to offset capital gains throughout the tax year.

Try to manage the timing of income or deductions prior to the end of each tax year. Does it make sense to defer income and accelerate deductions this year?

Position yourself on goals

Contributing to tax-advantaged accounts may allow more of your money to immediately go to work for you or may benefit you if taxes increase in the future.

Employer-sponsored retirement plans, such as 401(k) plans, and traditional IRAs can reduce taxable income and provide the ongoing benefit of tax-deferred compounding while saving for retirement.

A variety of small-business retirement accounts provide the same tax advantages for smaller companies and the self-employed. Roth 401(k) plans and Roth IRAs involve after-tax contributions, but grow tax free.

And if you’re saving for college, putting your money in a 529 plan or Education Savings Account can help your money grow tax-free and can help you avoid paying taxes on future withdrawals, as long as they’re used for qualified educational expenses.

Charitable contributions

Charitable contributions are deductible and can be a “feel good” method of reducing taxes. By gifting to charities or loved ones while you are alive, you can potentially reduce your estate tax liability and are able to share in the enjoyment of the gift while you’re alive.

But like most other aspects of investing, it is better to have a holistic plan about how you want to give.

Stay organized

Be conscious of deadlines for retirement plan and IRA contributions, required minimum distributions (RMDs), etc. Create a system for collecting receipts and tax documents from employers and financial services firms.

Keep in mind that tax season is a peak period for financial firms, which can be inundated by IRA contributions and requests for cost-basis information and tax documents.

Don’t wait until the last minute either before the end of the year or April 15 or you risk having your IRA contribution/distribution miss the desired tax year.

Ask for help

Increasingly technology is making do-it-yourself tax preparation achievable. However, professional tax preparers, particularly enrolled agents, CPAs and tax attorneys, might save you money by identifying tax credits or deductions to which you are entitled or preventing mistakes that could result in penalties, interest or an audit.

The tax implications of investing and saving can be confusing. Think of it this way, most of us wouldn’t open the hood of our car and attempt to fix the engine – we’d call a professional. Tax-smart investing is no different.

Mary Carroll Murphy is a Nashua-based independent branch leader with Charles Schwab. She can be reached at mary.murphy@schwab.com or 595-0438.