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Four Tips for Tax-Savvy Investors

Four Tips for Tax-Savvy Investors Why not see if any of the following strategies could allow you to keep more of what your investments earn?

Four Tips for Tax-Savvy Investors

A century ago, author Mark Twain wrote that the difference between a taxidermist and a tax collector is that the taxidermist only takes your skin. Today, the IRS isn't any more popular. Why not see if any of the following strategies could allow you to keep more of what your investments earn?

  1. Look into tax-managed mutual funds. Portfolio managers of tax-managed funds can use a number of strategies to help reduce the tax bite shareholders suffer. For example, they may strive to keep portfolio turnover low to help minimize taxable gains, or they may actively use losses to offset taxable gains.
  2. Consider municipal bonds and bond funds. Because the interest on a municipal bond is usually exempt from federal taxes, and sometimes state and local taxes, it may actually produce a better yield than a taxable bond with a comparable interest rate. The higher your income tax bracket, the more you may benefit from owning "munis."1
  3. Contribute to tax-advantaged retirement vehicles. You can now contribute up to $5,000 annually to an IRA plus an additional $1,000 per year if you’re over age 50 (for the 2010 tax year). Traditional IRAs offer tax deferral — you pay no taxes on earnings until withdrawal — and may provide tax deductions. Roth IRAs offer tax deferral and qualified withdrawals are tax free, but no tax deductions.2
  4. Use gains — and losses — to your advantage. If you have an investment and hold it for at least one year before selling, you'll pay a maximum federal tax of 15 percent on capital gains. The same rate applies for dividend income.3 Keep it for less than one year and you'll pay regular income taxes — up to 35 percent. Also keep in mind that if you intend to sell investments that have lost money, you can do so by Dec. 31 and deduct up to $3,000 in investment losses from that year's tax return. Additional losses can be carried over and used to offset future capital gains.

For More Information

If you’d like to learn more, Jamie Marner is a financial advisor with Morgan Stanley Smith Barney and works out of the Westfield office. To contact him, email james.marner@mssb.com , call 908-518-5427 or goto fa.smithbarney.com/marner


There are other tax strategies you can use, but be sure to consult your tax professional and investment professional before acting.
1Income may be subject to the alternative minimum tax. Capital gains, if any, are subject to taxes.

2Withdrawals before age 59½ are subject to a penalty tax. Each type of IRA has respective income limits as well as deductibility rules.

3Lower rates apply for long-term capital gains and dividends for taxpayers who are in lower tax brackets.

The author(s) and/or publication are neither employees of nor affiliated with Morgan Stanley Smith Barney LLC ("MSSB"). By providing this third party publication, we are not implying an affiliation, sponsorship, endorsement, approval, investigation, verification or monitoring by MSSB of any information contained in the publication.

The opinions expressed by the authors are solely their own and do not necessarily reflect those of MSSB.  The information and data in the article or publication has been obtained from sources outside of MSSB and MSSB makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of MSSB. Neither the information provided nor any opinion expressed constitutes a solicitation by MSSB with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

Tax laws are complex and subject to change.  Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Smith Barney Financial Advisors do not provide tax or legal advice. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their personal tax or legal advisors to understand the tax and related consequences of any actions or investments described herein.

Article written by McGraw Hill and provided courtesy of Morgan Stanley Barney Financial Advisor Jamie Marner

Interest in municipal bonds is generally exempt from federal income tax.  However, some bonds may be subject to the alternative minimum tax (AMT).  Typically, state tax-exemption applies if securities are issued within one’s state of residence and, local tax-exemption typically applies if securities are issued within one’s city of residence.

Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk.  In general, as prevailing interest rates rise, fixed income securities prices will fall.  Bonds face credit risk if a decline in an issuer's credit rating, or creditworthiness, causes a bond's price to decline.  Finally, bonds can be subject to prepayment risk. When interest rates fall, an issuer may choose to borrow money at a lower interest rate, while paying off its previously issued bonds. As a consequence, underlying bonds will lose the interest payments from the investment and will be forced to reinvest in a market where prevailing interest rates are lower than when the initial investment was made.  NOTE: High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. 

Please consider the investment objectives, risks, and charges and expenses of the mutual fund carefully before investing. The prospectus contains this and other information about the mutual fund.  You may obtain the appropriate prospectus by contacting a Morgan Stanley Smith Barney Financial Advisor. The prospectus should be read carefully before investing.

Morgan Stanley Smith Barney LLC. Member SIPC.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

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