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Personal Finance

We are dedicated to keeping clients abreast of the latest developments and tax-saving strategies. This section includes a library of hundreds of timely articles about business, taxes, finances, trends and the like. The articles are categorized by subject matter, which can be accessed from the links. Click on your topic of interest and find a wealth of information.

INVESTMENTS & TAXES

The following is a series of articles dealing with the special treatment of investments, income from the investments, and deductions associated with the investments.  Please call our office for more information on any of the topics discussed here.

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Zero Capital Gains Rate Requires Careful Planning
One of the greatest benefits of the tax code is the special tax rates that currently apply to gain recognized from the sale of capital assets held for more than a year (long-term).  The special tax rates apply to virtually all capital assets including stock, land, improved real estate, your home, and business assets in excess of the accumulated depreciation previously deducted. These special rates, which apply to net long-term capital gains (LTCG)(1) and qualified dividends are zero percent to the extent that your regular tax rate is 15% or less, 15% to the extent your regular tax rate is 25% through 35% and 20% for all other long-term capital gains.  These rates, which apply only to non-corporate taxpayers, also apply for the alternative minimum tax.

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Deducting Investment Interest
Generally, the only interest deductible on the Schedule A (where deductions are itemized) is home mortgage interest, with one exception, investment interest. Investment interest can be interest you pay on your brokerage margin account, interest on investment property such as land, etc. However, this interest deduction is limited to "net investment income." In layman's terms, you can only deduct the interest expense to the extent you have investment income.

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Deductions for Investors
The costs associated to your investments are deductible as a miscellaneous itemized deduction, subject to the 2% of gross income (AGI) limitation. Although they may seem trivial, it's still worthwhile to keep track of them as they can add up quickly. Combined with other allowable deductions, they can reduce your taxable income. Keep in mind, however, that investment expenses associated with tax-exempt income are not deductible. If the expenses are associated with both, you will need to prorate the expenses.

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Fine-Tuning Capital Gains and Losses
The year’s end has historically been a good time to plan tax savings by carefully structuring capital gains and losses. Let’s consider some possibilities.

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Capital Gains Tax on Inherited Assets
When an asset is sold, the owner owes capital gains tax on the profit. For these purposes, "profit" is the excess of the sales price over the owner's tax basis in the property. If the owner bought the property, his or her tax basis is generally equal to what he or she paid for it. Under the current rules, a beneficiary who inherits an asset is generally allowed to use the asset's value on the date the deceased owner died as his or her tax basis in the asset.

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Common Investment Errors
There are a number of ways that a little knowledge can be a risky thing when dealing with investments. Following is a brief overview of some common mistakes made by investors.

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Investment Tax Blunders to Avoid
If you can avoid the top ten investment blunders, you will save money on your taxes and perhaps even increase the returns on your investments. We realize that a mid-year review of your tax situation may not be at the top of your “to-do” list, but think of it this way: devoting a few minutes now could save you big bucks at tax time.

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Some Common Investments Enjoy Preferential Tax Treatment
Although there are a variety of sophisticated tax shelters available, our tax laws also afford special tax treatment to certain common types of investments. Used appropriately in conjunction with sound tax and investment planning, these special benefits may produce a higher after-tax return on your investment dollars.

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Is Life Insurance a Sound Investment?
Most people don’t look at life insurance from an investment perspective. However, it is becoming a popular option among corporations and trusts because it provides the best after-tax returns compared to other investment vehicles.

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Is Long-Term Worth the Wait and Risk?
Gains from the sale of capital assets such as stocks and other securities held over a year are referred to as long-term capital gains, while those held for shorter periods are called short-term. Long-term gains enjoy special tax treatment while short-term gains are taxed as ordinary income. Taxpayers are currently enjoying lower capital gains rates through 2012.

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Lower Rates for Long-Term Capital Gains
To take advantage of the long-term capital gains rates, you need to hold the asset longer than one year. The long-term rate depends on two things: your marginal tax rate and how long you have held the asset. The lower preferential capital gains rates do not apply to gains from collectibles (stamp collections, coins, art work, etc.) and gain attributable to depreciation recapture on sales of certain real estate. The rates shown below apply in 2013 and later years.

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Mutual Fund Dividends
There are almost an infinite variety of mutual funds available: specializing in bonds, stocks, tax free instruments, foreign and domestic investments, growth stocks, income investments, specific industries and market segments, etc. Regardless of a specific fund's investment strategy, most will generally pay some amount of dividends each year and those dividends will have a significant impact on your annual tax bite.

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Older Savings Bonds May Have Stopped Paying Interest
When a U.S. Savings Bond reaches original maturity, it automatically enters one or more extension periods (usually ten years). During these periods of extension, the bonds continue to earn interest. However, the extension periods for some bonds have expired, and they no longer earn interest.

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Taxes on Dividends
Through 2012, dividends received by an individual shareholder from domestic corporations (and certain foreign corporations) are treated as net capital gain for purposes of applying the capital gain tax rates. This means dividends are taxed at 15% for taxpayers whose marginal rate is 25% or higher, and 0% for those in the 10% and 15% Tax Brackets.

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Tax Strategies in a Down Market
Sell Loser Stocks To Offset Gains - With the roller coaster ride the stock market often provides, you may have a mix of winners and losers in your investment portfolio. If you have a net gain for the year, you should consider selling enough of the losers to offset the gain and produce a net loss of at least $3,000. This will erase your tax liability from the gains and allow you to deduct $3,000 against ordinary income. Don’t worry about having exactly a $3,000 net loss; any unused losses will carry over to future years.

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What's Best -Tax-Free or Taxable Interest Income?
A frequent taxpayer question is whether it is better to invest for tax-free or taxable interest. Generally, taxable interest will provide the greater return, but this may not hold true after taking into account taxes on the income. Therefore, the question is really which provides the greater "after-tax" return. There are basically four types of interest that can be excluded from income, either on the Federal return or the state return and each has its own special considerations.

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Wash Sales Could Take You to the Tax Laundry
Tax law allows you as an investor to offset capital gains with capital losses, and if the losses exceed the gains, you can deduct losses up to a maximum of $3,000 ($1,500 if filing married separate) for the tax year. For this reason, investors frequently review their securities portfolio at year's end searching for stocks and other securities whose sales will result in a capital loss.

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