What does Tax Freedom Day mean for you?
You may not have realized it, but April 26 is Tax Freedom Day. It’s not a holiday that generates presents, a day off from work or even greeting cards, but, in its own way, it can help illuminate an important part of your life – the taxes you are paying on your investments. Tax Freedom Day is the date when average Americans will have earned enough money to pay their federal, state and local tax bills for 2006. Each year, the Tax Foundation, a nonprofit tax policy research organization, calculates when Tax Freedom Day will occur. The date changes from year to year, based on changes in tax laws and the rate of economic growth in the country. Of course, the idea of a day in which you have put taxes behind you for the year is something of a fiction. After all, taxes are typically withheld from every paycheck you get, unless you are self-employed, in which case you probably pay taxes every quarter. And yet it’s useful to think of Tax Freedom Day because it can push you toward looking at your own tax situation and seeing if you can make some changes – especially in the area of investment taxes.If you think you may be paying too much in taxes on your investments, what can you do about it? Here are a few steps you can take: n Put more money into tax-deferred retirement accounts. If you have a 401(k), 403(b) or other employer-sponsored retirement plan, contribute as much as you can afford. And consider increasing your contributions every time you get a raise. You generally fund your plan with pre-tax dollars, so the more you put in, the more you can lower your annual adjusted gross income. And your earnings have the potential to grow on a tax-deferred basis, so you pay no taxes until you start taking money out of your plan. n Look for tax-free investment opportunities. If you are in one of the higher tax brackets, you might benefit from owning municipal bonds. When you own municipal bonds, or “munis,” your interest payments will be free from federal income taxes; if the municipality that issues the bond is located in your state, your interest payments also may be exempt from state and local taxes. (However, some municipal bonds may be subject to the alternative minimum tax.) Your Roth IRA earnings are also tax-free, provided you don’t take withdrawals until you are at least age 59-1/2 and you’ve had your account for five years. n Hold stocks for the long term. Income taxes aren’t the only types of taxes associated with investing; you also may have to pay capital gains taxes. That’s why it makes sense to be a “buy and hold” investor. If you hold your stocks for more than one year before selling them, your gains will only be subject to a maximum capital gains rate of 15 percent (effective through Dec. 31, 2008). But if you sell your stocks within a year of buying them, your gains will be taxed at your ordinary income tax rate. n Be sure to consult your tax advisor before making any decisions. By following these and other “tax-smart” investment moves, you may be able to speed up the progress toward your long-term financial goals. And who knows? You may even be able to push back the date of your personal Tax Freedom Day. Charlie Wick, Tina DeWitt and Bert Roy are investment representatives with Edward Jones. They can be reached in Eagle at 328-4959, in Edwards at 926-1728 and in Avon at 845-1016.Vail, Colorado