Posts Tagged ‘Taxes’

Charitable Giving is Good for you & for your Taxes – Tax deductible contributions

I am a big proponent of Charitable giving. I raise funds at this time of year to sponsor and support few kids education back home in India. I always like to follow the proverb, that what you give from one hand shouldn’t be known to the other. But at the same time, its not always […]

Efficient Mutual Fund Investing by Avoiding Taxes

Mutual funds have been one of the safest avenues for many American to invest for the future whether its for retirement or kids education. Mutual fund companies have gained their reputation by showing good returns and solid growth. Many mutual fund companies have evolved strongly by good fund analysis with strong results and catering to various needs of the investor gaining investor sentiment from novice to veterans.

Many of us invest in mutual funds because it is bit safe and saves time as the fund managers are paid to do the job of portfolio analysis, effective investment by incorporating diversification and asset allocation strategies according to each fund’s goal. Another main reason, mutual funds are less expensive for amount of diversification and assets involved in the funds. If someone has to do the same kinda of diversification, it would cost more on transaction fees alone not to add other cost. So it is not prudent unless you have big asset to handle.

Above all, we look for good, solid return and performance. On the downside, we really don’t pay attention to the taxes on mutual fund earnings. We all know not all mutual funds are made equal but all them have the tax component associated with it. Taxes can be biggest drag on the funds performance. Every year many investors lose certain percentage points of fund returns because they don’t try to lower their taxes.

It is not a big science or need to learn lot of tax codes to implement it. Just by keeping certain aspects of tax saving concepts in mind and adapting them which will help you portfolio. Here is the list of 3 simple strategies/concepts you can follow while trying to invest in mutual funds.

1. Low Turnover Ratio – Check for a fund’s portfolio turnover ratio which is the percentage of its assets that were sold during the most recent quarter or year. If the fund has high turnover ration mean it is a more aggressive fund. For example, a turnover of 500% means a fund sold the equivalent of its entire portfolio of securities five times during the year. That raises a fund’s expenses, and the likelihood of capital gains taxes. It is a good idea to limit your tax consequences by avoiding funds that trade most of their holdings in a given year. That means being wary of turnover ratios above 50%.

2. After-tax Return – Like you calculate any material cost after taxes, calculate fund tax return after taxes. So look beyond a mutual fund’s pretax return is wise thing to do. After tax returns will give the right picture of profit margin after all the tax deductions. The tax-adjusted return accounts for capital gains, dividends and interest.

3. Capital Gain – If you are worried about big tax bill, it is good idea to analyze a funds possible capital gain exposure before you buy it. Possible exposure tallies capital gains that haven’t been distributed to shareholders and divides that number by total net assets.

If you don’t want to go through the head-ache of analysing every funds, you have option to go with tax-efficient funds or ETF’s.

Tax Efficient funds, also called as Tax Advantage  funds, are structured and operated on reducing the tax liability faced by its shareholders. It uses variety of techniques to keep the taxes low by purchasing tax-free (or low taxed) investments such as municipal bonds, Low turnover ratio, Offsetting gains by selling other stocks at a loss and Investing in lower-dividend-paying stocks to minimize passthrough dividends.

In conclusion, mutual fund investment can really reap better rewards if you give little bit of attention every year and plan accordingly by lowering taxes.

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What did you do with your tax refund?

Tax season is finally over. Some of you might have filed the tax on time over internet and already got your refund from Uncle Sam. Some of you might have filed in paper and waiting to hear from IRS which might take few weeks. Obviously some of you might  filed for an extension since you didn’t have enough time to get through with it. It would be good to file taxes soon as possible and get it over with it and avoid paying penalties or avoid giving interest free loan to IRS if you expect a refund.

Plan ahead for next year Taxes

Anyway, if you are among many Americans who filed early and got your refund, good for you. It is not a good idea to leave your money with IRS which is interest free loan to the government instead you could earn interest on the money. Also many think, getting a refund is a good thing. Not really and not always. If you planned properly ahead taking advantage of tax codes and deductions and filed your W4 with your employer to deduct the proper amount, you wouldn’t be recieving the refund now instead you might got more money on every paycheck which you could have saved regularly. Try to plan ahead atleast this year and submit updated W4 if there is a change in your household or income and not give IRS interest free money.

I know people like me who are self employed or don’t have standard income every year and also have deductions all over the place, they won’t be able to easily judge their regular/estimated tax payments and end up paying 100% of your last tax amount to be on safe side and sometimes we end up getting reasonable amount of refund back taking all deductions. As of 2009 IRS tax stats card, IRS paid out on average $3000 as tax refund to individuals. 

So going back to the actual topic, if you got your refund check, what are you planning to do with the lumpsum money? 

I plan to spend part of my $1200 refund for home improvement by adding hardwood or laminate floor which will reduce carpet maintenance and good if I want to rent out later. Another part, I plan to put in a savings account for now and decide later.

What are you going to do?

I googled and found some usual answers like some are planning to buy a big screen TV or new gizmo like iPad, some thinking about exotic cruise or vacation in carribean and some planning to buy/upgrade your home appliances and some planning to put a downpayment for their new car. Here are some ideas which every financial guru will suggest which works for your favor.

Things you can do with your refund

1. Pay off your high interest credit cards or atleast reduce the balance if you a big one which will save you interest in the long run.

2. Put in Roth/Traditional IRA for your retirement.

3. Try to save for your kids college education in 529 plan or Coverdall Plan or open a new CD.

4. Make a value added improvement to your home so you can get better return when you sale it at later time.

5. If all above seems lot of work, just take a CD from ally bank or SmartyPig or any other bank which gives some good rate of return and make the decision later. It can be either used for future car or home or business venture. Don’t just throw your money for something which doesn’t yield a return.

You can also find more options at Credability has conducted a contest and I am hoping to get some good ideas from consumers. I will post the some them when they release the results in few weeks. Until then, you can either put  the money in savings account or follow some the above mentioned ideas.

Are you interested to know how your tax dollars get spent by the government? Check out and enter your income. It will split out the propotion of your tax dollars spent on different categories.

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