Tax-wise strategies for year-round planning

Feb. 1, 2002

Minimizing your taxable income through a vehicle such as a tax-exempt bond fund is one of the best ways to reduce your tax liability.

Generally speaking, as you increase your income and assets, your tax liability increases too. But with effective, year-long planning — employed well before April 15 — you may reduce your tax burden. The following tax-advantaged financial strategies may help you keep more of what you earn:

Use tax-wise investments — Minimizing your taxable income through a vehicle such as a tax-exempt bond fund is one of the best ways to reduce your tax liability. The interest you earn on tax-exempt municipal bonds is not subject to federal income tax, so the bond may serve the dual purpose of generating income while helping you save on taxes.Defer taxes by investing in your retirement plan — The money earned in tax-deferred vehicles is not taxed until you withdraw it. Consider making the maximum allowable contribution to your traditional individual retirement account (IRA), 401(k), or other qualified retirement plan. Or consider a Roth IRA, which allows assets to grow and be withdrawn tax-free, subject to certain restrictions. Full Roth contributions (maximum of $2,000) are permitted for couples with incomes up to $150,000 and singles up to $95,000.Restructure debt to maximize allowable interest deductions — Interest you pay on personal debt, such as personal loans and credit cards, is not tax-deductible. However, the interest on home equity financing of up to $100,000 is 100 percent deductible in most cases.* Consider taking out a home equity loan or line of credit to pay off your personal debt and benefit from a deduction.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. Unused losses may be carried forward indefinitely and deducted in later years within the same limits.

Note: Remember to include transactions within a family of mutual funds, including switching from one fund to another. Such a switch will produce a taxable gain or a deductible capital loss (unless the transaction occurred inside an IRA or other tax-deferred account).

Time your buying of fund shares — 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'll immediately have a gain that 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.Make charitable contributions — If you wish to donate appreciated assets — such as stocks — to charity, donate the property itself rather than selling it and donating the proceeds. You will get a deduction for the full fair market value of the assets and avoid paying tax on the appreciation.

On the other hand, if gifting depreciated assets, consider liquidating first and donating the cash. You then may 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. Remember to consider your goals and objectives when making investment decisions. Contact your tax adviser for more information on tax-wise investment strategies that can save you money.

Your annual tax refund
Are you giving Uncle Sam an interest-free loan? If you receive a federal tax refund every year, consider adjusting your W-4 form so you can stop lending your earnings interest-free to the government. To avoid such overpayments, calculate your withholding exemptions carefully, adjusting them if your circumstances change. The increase in your net pay could add up to hundreds of dollars that you can save and invest each month. You can calculate your W-4 withholding at

When you do receive a tax refund, large or small, carefully consider how you can maximize the value of this "found money." While the urge to spend it can be strong, that may not be the wisest way to use these dollars. By investing your tax refund, you can earn even more money for your future.

* Not available in Texas for homestead property. Consult your tax adviser regarding your individual circumstances.

Kathleen Adams, RDH, BS, is a financial adviser with Waddell and Reed ( She is currently trying to initiate money-management workshops for hygiene students and specializes in working with dental professionals. She can be reached at (800) 210-1357.