Waddell & Reed

Investor Strategies

Do you worry about minimizing the amount of taxes you pay on your investments? Effective, year-long tax planning can help. Here are six investor strategies that may help you keep more of what you earn.

  • Make tax-exempt investments.

    You could potentially reduce your tax liability by investing in a tax-exempt municipal bond fund. Generally, interest earned on tax-exempt municipal bonds isn’t subject to federal income tax*. This type of investment may help you generate income while helping you save on taxes.
  • Defer taxes by investing in your retirement plan.

    The money earned in tax-deferred retirement funding vehicles (such as IRA and 401(k) plans) isn’t taxed until you withdraw it. Making the maximum allowable contribution can significantly reduce your tax burden while you’re in the higher tax brackets.
  • Restructure debt in an effort to maximize allowable interest deductions.

    Interest you pay on personal debt, such as personal loans and credit cards, isn’t tax deductible. However, the interest on home equity financing can potentially be deductible. Consult your tax advisor regarding your individual circumstances.
  • Keep track of capital losses.

    Capital losses offset capital gains dollar for dollar. Each year you may deduct up to $3,000 of capital losses, in excess of capital gains, against ordinary income. Carry unused losses forward indefinitely to deduct them in later years. Include transactions within a family of mutual funds, including switching from one fund to another. Such a switch will produce a taxable capital gain or a deductible capital loss (unless the transaction occurred inside an IRA or other tax-deferred account).
  • Buy fund shares after its distribution.

    Most stock mutual funds declare their capital gains distributions just before the end of the year. If you invest in a mutual fund that shortly thereafter announces its capital gains distribution, you suddenly have a gain you must claim on your tax return. Instead, consider waiting until after the fund makes its distribution before you invest. You may locate a fund's distribution schedule by checking the fund's prospectus. See Waddell & Reed Advisors Funds prospectuses.
  • Make the appropriate charitable contributions.

    How you make tax-advantaged donations to charities depends on whether the property you donate has appreciated or depreciated.
    • If your assets, such as stocks, have appreciated, donate the property itself rather than selling it and donating the proceeds. Then, you get a deduction for the full fair market value of the assets and avoid paying tax on the appreciation.
    • If your assets depreciated this year, liquidate first and then donate the cash. You can then deduct the capital loss and take a deduction for the charitable contribution as well.

Tax considerations are only one aspect of your overall financial plan. The tax information in this section of the website is for informational purposes only. It is not intended, and should not be construed, as a recommendation, or legal, tax, or investment advice. You should consult your tax advisor to answer questions about your specific situation or needs. NOTE: We encourage all investors to work with a financial advisor to develop an individual, comprehensive financial plan.

* May be subject to state or local taxes or the federal alternative minimum tax.

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