Tax-Efficient Investing: A Wise Choice

By: David Chazin
In conjunction with Sagemark Consulting, a division of Lincoln Financial Advisors, a registered investment advisor. Mr. Chazin is a regular contributor to PlannerConnect

Taxes can take a chunk out of your investment returns; yet, many investors don’t give much thought to taxes when they make investment decisions. While investment decisions shouldn’t be based entirely on tax considerations, tax-efficient investing may make a significant difference in your net gain. Employing some of the following strategies could help you retain more of your potential investment earnings and lessen your tax obligation.
Invest in Stocks for the Long Term
Following a buy-and-hold strategy for your stock investments may save on taxes in the long run, as well as potentially increasing your net worth. If you trade your stock holdings frequently ? even if it’s only once a year ? you may end up owing estimated taxes and a significant capital gains tax on your profits. Capital gains are taxed at 15% on investments you hold longer than one year (5% for gains that would otherwise be taxed in the 10% or 15% marginal federal income tax bracket). Gains on investments you’ve owned one year or less are taxed at your regular federal income-tax rate, which may be as high as 35% for 2005. So, even if you reinvest your sales profits, taxes will reduce the amount you’re reinvesting, effectively diminishing the size of your portfolio and its overall potential return.
Tax-Exempt Investments
Tax-exempt investments, such as municipal bonds, produce income that is generally exempt from federal ? and often state and local ? income tax. If you’re seeking income rather than growth, municipal bonds may be a good choice. This is especially true for investors in higher tax brackets. Income from municipal bonds may be subject to the alternative minimum tax. To determine whether you would be better off buying a taxable or a tax-exempt investment, you need to calculate what a taxable investment would yield on an after-tax basis and compare that with the return on a tax-exempt investment. To do this, subtract your marginal tax rate from 100% and multiply this percentage by the rate of return the taxable investment is earning. That will give you your after-tax yield. Compare this with the yield on the tax-exempt investment to find out which is higher. For example, if you are in the 30% marginal tax bracket, a taxable investment return of 6% equates to an after-tax return of 4.2% (100% – 30% = 70%; 70% Ч 6% = 4.2%). Thus, a tax-exempt investment yielding higher than 4.2% will give you a better yield after taxes are considered.
Sell a Loser To Offset a Capital Gain
Capital losses offset capital gains dollar for dollar and up to $3,000 of ordinary income a year. If you will have capital gains to report on your income-tax return, consider selling a losing investment and applying the loss to offset an equivalent capital gain.
Mutual Funds with Low Turnover Rates
A mutual fund’s turnover rate measures the extent to which the fund sells securities and replaces them with new ones: the higher the turnover rate, the more frequently the fund’s managers are trading the fund’s holdings. Turnover rate is important to you as an investor because, when the fund sells securities, a capital gain or loss generally occurs for tax purposes. A portion of any capital gains realized by the fund is taxable to you, even if no distribution occurs or if your distribution is reinvested in additional fund shares. A low turnover rate indicates that capital gains generated by sales of appreciated securities should be kept to a minimum, allowing you to wait until you sell fund shares to take potential profits.
Tax-Deferred Retirement Plan
Don’t neglect your retirement plan as a vehicle for tax-deferred investing. Participating in an employer’s 401(k) or 403(b) plan (or a Keogh plan, if you’re self-employed) reduces your tax obligation, since taxes on your contributions and earnings generally are deferred until you withdraw funds from the plan, typically at retirement. Distributions may be subject to income taxes and if made prior to the age of 59 Ѕ, are subject to an additional federal 10% penalty. Individual Retirement Accounts (IRAs) are another option to consider if you are eligible. Your contributions to a regular IRA may be tax deductible. And, although contributions to a Roth IRA are not deductible, account earnings are tax deferred and can ultimately be withdrawn from the Roth IRA income tax free, provided certain conditions are met. Hanging onto as much of your hard-earned money as possible is the goal of tax-advantaged investing. Your financial advisor can help you invest with this goal in mind.
David N. Chazin is part of a network of qualified financial planners affiliated with PlannerConnect. You can reach him at David.Chazin@LFG.com, or to connect with a financial planner in your area please call (800) 318-7848, or visit the PlannerConnect website.
Mutual funds are offered by sprospectus. An investor should carefully consider the investment objectives, risks, charges and expenses of an investment company before investing. To obtain a prospectus that contains this and other information call or ask your financial representative for a free prospectus. Read it carefully before you invest or send money. The investment return and principal value of an investment will fluctuate with changes in market conditions so that an investor’s shares, when redeemed may be worth more or less than the original amount invested.
David N. Chazin, is a registered representative of Lincoln Financial Advisors, a broker/dealer, and offers investment advisory service through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor,3000 Executive Parkway, Suite 400, San Ramon, CA 94583, (925) 275-0300. Insurance offered through Lincoln affiliates and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances.
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Use The Same Techniques The Rich And Famous To Avoid Taxes!

By: Lee H
"You've probably read in the newspapers of various celebrities and successful business who manage to avoid or at least substantially reduce their UK taxes – whilst a significant proportion of the general public are paying close to 50% of their income in tax. Well, there's nothing to prevent you using some of these techniques to slash your UK taxes as well, depending on your circumstances.
Here's some of the techniques that the Rich & famous use:
Make the most of your offshore status
People like Mohammad al Fayed make tremendous use of their non UK domiciled status. If you're an overseas national and were born overseas (typically your father will also have been a non UK domiciliary at the date of your birth) you can avoid paying any tax on your overseas income and capital gains.
The main condition to this is that you need to keep the income or proceeds outside of the UK. As you'd expect though there are ways around this to enable some of the proceeds and income to be brought into the UK free of taxes
Make the most of your spouses offshore status
If you're lucky enough to have a husband or wife that is either non UK resident or non UK domiciled you can use their offshore status to your advantage. This is what Philip Green did (the billionaire owner of BHS). His wife is a resident of Monaco and he ensured that she extracted dividends from his UK companies free of UK (and overseas) tax.
This saved him paying UK tax of around Ј200Million that he would have otherwise had to pay if he'd extracted the dividends.
Using a tax efficient holding company.
Famous bands such as U2 and the Rolling stones make use of some of the best offshore companies to avoid paying tax on much of their income. U2 for example used to fall within the Irish tax regime which had a longstanding tax exemption for artists. When this loophole was tightened up, they moved their holding company to the Netherlands to take advantage of tax free royalties.
There are lots of other countries that can also offer tax efficient holding companies such as Spain, Denmark and Cyprus. Using tax efficient trading companies.Multinationals such as Coca Cola make good use of a string of offshore companies to ensure that they can redistribute profits within the group to reduce the overall 'effective' rate of corporation tax. (It is reducing this effective rate that is the main focus of many in house tax lawyers lives!)
Actually move overseas Celebrities such as James Blunt, Michael Schumacher and Boris Becker have all moved offshore to ensure they have only limited UK tax obligations. They've based themselves in Switzerland and are local residents. The beauty of Switzerland is the 'fiscal deal' which allows the tax liability to be fixed at an artificially low amount. So there you have it – some ideas to get you thinking about how you could use the offshore tax planning techniques of the rich and famous.
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Inheritance Tax in the UK

By: David Sprake
Inheritance tax in the UK is payable when a large valued estate is handed over to a person, persons or business entity. Inheritance tax is usually due, or will potentially be due, when a person dies.
There are also other occasions when it could be due, such as – when assets are transferred to a company or discretionary trust. Even if you are not due Inheritance tax, because the amount is too small, you will still have to fill out a grant of representation. There are certain instances where this is not required, but for the most part you will have to.Inheritance tax acts as a major burden on larger estates than it does on smaller ones.
With larger rises in property rises, it can impact sums of money by a very significant percentage. The tax becomes larger as a percentage as the amount increases.
For example, on the top tier of a 300,000 pounds inheritance you could expect to pay 40%. Inheritance tax also applies for marriages and is due when the amount passes a certain threshold in terms of gifts the married couple receives from family and friends. As a parent you are allowed to give a gift for up to 5000 pounds and anything over will be taxed accordingly. Like wise, you will be due tax on any money you receive from grandparents over 2,500 pounds and 1,000 from friends who are not related to you.

When Do You Pay Inheritance Tax and what is the Threshold?
If the value of a gift is below the threshold then you do not have to pay inheritance tax, however that varies and is not fixed. Certain types of estate do not require tax to be deducted so that must become a factor in your calculation. The items that do not require tax deduction include shares in companies which are not quoted on the stock-market (private limited companies, sole proprietorships and partnerships) and the amount which it costs for the funeral in the case that you have inherited estate from someone who has died.

What are the Late Payment Charges?
Late payment is charged on any payment which is not paid by the due date. No matter what reason is to blame, such as not being able to get the money, shares or property on time. In the instance where you do have to make late payments they are usually fairly reasonable, around 5%. This is around the same value which you would accrue in a bank account; therefore the government is getting the money they would otherwise get from a bank if it was placed there. If you are inheriting the money from a bank account and get paid late, you will likely have accrued a similar amount of money there.

Who Has to Pay Inheritance Tax?
The person or persons who are getting the money have to pay the inheritance tax; therefore if you are listed in the will then you are responsible. You are due to pay inheritance tax based on the percentage of the taxable estate which you are set to gain.
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