Financial Planning: Understanding the Table Leg of Tax

‘Tis the season for stock market year-end reviews along with 2020 predictions to get spread across investors’ tables. Our recommendation is to use a table with four legs.

Finding the next dollar of growth will get all the attention. But, that’s just one leg. There are three more that can put the same dollar in your pocket.

1. Risk

2. Cost

3. Tax

4. Growth

The dollars in your account from the first three are much easier to find because you already have them. All you have to do is keep more of them.

[Read Part 1 of our Year-End Financial Planning Series on Risk]

[Read Part 2 of our Year-End Financial Planning Series on Cost]

I gladly pay my taxes for the extraordinary privilege of living in this country. The ability to achieve success is more than worth the price of admission every year. BUT, after we give more than our fair share, then enough is enough!

When Does Your U.S. State Reach Tax Freedom Day?

We all work so hard and long each year before we get to keep anything we earn in our own accounts. Here is how long it takes for taxpayers in each of the 50 states to have collectively earned enough money to pay their federal, state, and local taxes for the year:

tax freedom day 2019 cpa krueger catalano houston texas

Once that first dollar we get to keep hits our taxable accounts each year, let’s not pay unnecessary taxes on investments. There are countless and complex ways to plan around -- or to eliminate taxes.

The two easiest and longest-lasting methods are holding individual stocks and bonds in your own private account. Why not a mutual fund? When you own a stock or bond inside a mutual fund you are letting other investors decide when you will pay taxes based on their inflows and outflows.

Imagine owning something that loses value in a year but then sticks you with a tax bill for gains?! That can happen any year in mutual funds, and those involuntary invoices are called 1099’s.

“There are two systems of taxation in our country -- one for the informed and one for the uninformed.” - Anonymous

Don’t Pick Up Someone Else’s Tax Bill

Imagine selecting a restaurant for dinner. No matter how good their reviews and ratings are, you would never agree to go to a restaurant that forces a crazy rule upon seating - that if any nearby party is about to get up and leave, you split the tab.

That’s exactly what happens with taxable gains from a mutual fund even if you have yet to participate in one penny of profits yet. If we’d never sit at that dinner table, why would we even consider it for our investment table?

If you own the exact same companies that your mutual fund manager holds, but in your own account in your own name, and choose not to sell a big winner, there is no capital gain to distribute.

An even simpler way to pay even fewer taxes (zero!) is to own Tax-Free Municipal Bonds in your own account. Almost all households wish to pay fewer taxes on investments, yet almost NONE of them own these bonds.

I like both individual stocks and bonds -- for the same reason I tell my kids we must put broccoli (bonds) next to our meat (stocks). We can hold them at our own investment table, not Wall Street’s with uneven and wobbly legs.

We invite you to subscribe to our email newsletter (sign-up form below) to receive information on our complete year-end financial planning series on risk, cost, tax, and growth. We are here to help you on your journey to Financial Freedom!