5 Tips to Reduce Your Tax Liability With Stocks and Bonds Oh My!

  1. Mine your portfolio for tax savings. As an investor, you might not always have control as to how profitable your investments are, but you do have significant control over their tax liability. As the year winds down, add up the gains and losses on sales to date and review your portfolio for paper gains and losses. If you have a net loss at this time, you have an opportunity to take a bit of profit tax free. Alternately, a net profit on a previous sale can be offset by realizing losses on sales before the end of the year. Remember, this strategy will only apply to assets held in a taxable account, not tax deferred retirement accounts such as IRAs or 401(k) plans.


  1. Pay tax sooner rather than later on restricted stock. If you receive restricted stock as a bonus, consider making what’s called an 83(b) election. If you go this route, you will pay the tax immediately on the value of the stock rather than waiting until the restrictions disappear when the stock “vests.” You might be wondering why pay tax sooner than later, since it is your money. Paying the tax now, you will be paying tax on the stocks value of the stock when you receive it, which could be far less than the stocks value at the time it vests. Tax on appreciation that occurs in between then qualifies for a favorable capital gains treatment. If you do decide to run with the pay now crowd, don’t procrastinate. You only have 30 days after receiving the stock to make the election.


  1. Minimize the bite of the “kiddie tax.” The rule that taxes a child’s income at the parents’ rate now covers children up to the age of 19 or 24 if the child is a full-time student. You can reduce the damage by steering a child’s investments into tax free municipal bonds or growth stock that won’t be sold until the child reaches the age of 19, or 24 if they are a student.


  1. Consider tax free bonds. Simple math can let you know if you will come out ahead with taxable or tax-free bonds. Simply divide the tax-free yield by 1 minus your federal tax bracket to find the “taxable equivalent yield.” If you’re in the 33% bracket, your divisor would be 0.67 (1-0.33). So, a tax-free bond paying 5% would be worth as much to you as a taxable bond paying 7.46% (5/0.67). A bond swap may pay off. As market interest rates rise, bond values fall, if you have bonds that have lost value, consider a bond swap. You sell your losers, cash in the tax loss and invest the proceeds in higher-yielding bonds to maintain your income stream.


  1. Use Treasury bills to defer taxes. Interest on three and six month Treasury bills are taxed in the year it is paid. So, buying a T-bill that matures in 2014 means you don’t have to report the income until you file your 2014 return in 2015. Keep in mind that treasury interest is completely exempt from state or local taxes too.


All in all, the tax liability from your investments may sound overwhelming, but garvey & garvey, llc CPAs can easily assist investors in establishing a method that is appropriate for them so that there are no unwelcome surprises when the tax year ends.