Investor Education | Taming Investment Taxes

The Tax Cuts and Jobs Act lowered the marginal tax rates that apply to ordinary income, such as wages and interest from bonds and savings accounts, for 2018 through 2025. Fortunately for investors, capital gains and qualified dividends still receive preferential tax treatment.

Although your investing strategy should be based primarily on your financial goals, time horizon, and risk tolerance, it’s important to pay attention to the tax implications of your investment deci-sions. This may be more complicated than it first appears. For example, income from investments held in taxable accounts could push more of your overall income into a higher marginal tax brack-et or beyond a threshold that would trigger taxes on Social Security benefits and higher Medicare premiums.

Here are several strategies that could help reduce your overall tax burden.

Capital Gains and Dividends

Stocks sold for a profit may be subject to the capital gains tax. Long-term capital gains are prof-its on investments held for more than 12 months. Qualified dividends (from stocks held for at least 61 days within a specified 121-day period) are subject to the same tax rates as long-term capital gains. Nonqualified dividends and short-term capital gains are taxed as ordinary income.

High-income taxpayers may also be subject to a 3.8% net investment income tax on capital gains, dividends, interest, royalties, rents, and passive income if their modified adjusted gross income (AGI) exceeds specific thresholds ($200,000 for single filers or $250,000 for joint filers).

Strategy: If you have realized net capital gains from selling stocks for a profit, you might avoid taxes on some or all of your gains by selling losing positions by the end of the year. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if married filing separately) or carried forward to reduce your taxes in future years.

Mutual Fund Distributions

Mutual funds are required to distribute realized capital gains and any interest or dividend income to shareholders on an annual basis. When mutual funds are held in taxable accounts, shareholders must pay taxes on these distributions (as long-term or short-term capital gains, dividends, or interest) for the year in which they are received, even if the distribution is reinvested in new shares.

On the specified distribution date, each investor receives a payment equal to the per-share distribution amount multiplied by the number of shares he or she owns, and the fund’s share price (or net asset value) is reduced by the per-share distribution amount.

Strategy: Before purchasing mutual fund shares, you should check the timing and amount of upcoming distributions (typically in December) to potentially avoid taxes on gains you didn’t participate in.

Portfolio Placement

Consider the tax efficiency of the various types of investments in your portfolio. For example, some mutual funds turn over securities more frequently and can run up larger tax bills than funds with less turnover. Fixed-income investments that generate interest, and short-term capital gains triggered by more frequent trading, are taxed as ordinary income at higher rates.

Strategy: Hold investments that are less tax efficient in a tax-deferred account whenever possible.

The return and principal value of stock and mutual fund shares fluctuate with changes in market conditions. When sold, shares may be worth more or less than their original cost. Before you take any specific action, you should consult with your tax professional.

This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2019 Broadridge Investor Communication Solutions, Inc.

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.


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