Important Updates for Investors
Carla Pasternak's Premiere Issue of High-Yield International Just
Released
Income expert Carla Pasternak's debut issue of High-Yield
International covers a Taiwanese manufacturer yielding 9.5%... a
rare Mexican monopoly yielding 13.4%... and other top-performing
investments yielding up to 19.0%.
Government's Biofuel Timetable Could Spell +15,900% Growth
+15,900% growth might seem far-fetched... but it's not. In fact, it
is mandated by law. And I've identified the ONLY stock positioned to
capture this growth.
The
Silver Lining to a Falling Dollar
Despite the U.S. national debt, there is a silver lining for income
investors. This massive spending, combined with movement out of U.S.
Treasuries, is going to take its toll on the dollar, and
international income investors could reap the rewards in the form of
higher dividends. |
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How
to Keep Uncle Sam at Bay -- and Boost Your After-Tax Returns |
Published: March 31, 2008
With April 15th right around the corner, millions of last-minute
tax filers will be scrambling to complete their 1040 form over
the next couple weeks. By that point, nearly every taxpayer will
know whether they have to cut a check to Uncle Sam, or whether
they can expect to receive a nice refund.
In either case, there's a good possibility that you could have
been sitting even better -- with either a narrower tax liability or
a fatter refund. I'm not referring to any obscure deductions you
may have missed. Instead, take just a few minutes to skim back
over Schedules "B" and "D" one more time.
Quite possibly, you may have reported hundreds or thousands of
dollars in dividend payments, income and capital gains on those
pages -- and the government will be expecting a cut of the
proceeds.
Are You Giving Money Away?
It may be hard to believe, but it wasn't that long ago that
dividend distributions were taxed twice: once at the corporate
level and then again at the individual level (at marginal rates
of up to 38.6%). That all changed in 2003, when legislation was
enacted that reduced the tax on dividends to just 15%.
However, when it comes to the IRS things are seldom
cut-and-dried, as there are numerous securities that fail to
qualify for the favorable tax treatment, including distributions
made by REITs, partnerships, many foreign stocks, and interest
income generated by bonds and other fixed-income instruments.
Therefore, the distributions made by most income-oriented funds
-- which typically invest in a broad mixture of stocks, bonds,
convertibles, preferred shares, and other income producing
securities -- aren't fully entitled to the tax break. If an
investor receives distributions totaling $3.00 per share from an
income fund, it's a safe bet that they might wind up with as
little as $1.95 (assuming an income tax rate of 35%) or so in
their pocket -- and possibly less depending on state and/or local
taxes.
Assuming a
net asset value (NAV)
of $30.00, the same fund above would have a hefty pre-tax yield
of 10% ($3.00/$30.00). But once the government has taken its
share, the after-tax payout would be reduced to just 6.5%. In
that case, the annual after-tax income generated from a $50,000
investment would drop from $5,000 to just $3,250 -- and keep in
mind, that lost $1,750 would have accrued compound interest of
its own.
In fact, a $50,000 investment earning 10% would be worth
$129,700 after ten years, versus just $93,900 for one earning
6.5% -- a tax burden of more than $35,000. However, as
you'll see below, shifting that income into a tax-advantaged
fund (reducing the 35% tax rate to 15%) could put nearly
$20,000 of that amount back in your pocket.
Tax Efficiency isn't just for Income Investors
Fortunately, there are ways to reduce that tax bill -- while
still giving Uncle Sam his due. Naturally, the first option
would be to shelter the income inside an IRA or other
tax-deferred vehicle. However, for the purposes of today's
article, we'll assume you've already taken full advantage of any
retirement plans and are looking to protect other assets from
tax erosion.
In that case, the closed-end fund world has launched an entire
wave of new offerings designed to meet one investment mandate:
seek out and profit from only those securities that qualify for
the reduced 15% rate. These "tax-advantaged" funds can go a long
way toward minimizing the tax liability that will be tallied up
on your Schedule "B."
But what about Schedule "D," where you recognize all the
realized short and long-term capital gains? That growth fund won't typically
throw off much in the way of dividends or income; however, in
the process of buying and selling individual stocks, it will
likely churn up some capital gains, and those can also lead to a
large tax bite -- even if you don't sell your shares.
For example, consider the AIM Global Equity "A" Fund (GTNDX),
which has ridden stocks like Nokia (NYSE: NOK) and ExxonMobil
(NYSE: XOM) to a hefty +16.5% annualized return over the past
five years. While that figure looks great on paper, it loses
some luster when you consider that the fund's managers have been
trading frenetically. They haven't actually netted anything
close to the return quoted above. In fact, a shareholder in the
highest tax bracket would have only seen after-tax gains of
+10.7% over the five-year period -- forfeiting more than
$24,000, assuming an initial investment of $50,000.
Fortunately, just as there are a multitude of closed-end funds (CEFs)
designed to cut down on needless dividend taxes, exchange-traded
funds can be equally useful in minimizing capital gains taxes.
Important Note: In the
remainder of this article,
ETF
Authority editor Nathan Slaughter provides in-depth
profiles of his two favorite tax-advantaged funds. Both of which
invest in foreign markets and provide total returns in excess of
+25%, but each is taxed at just the 15% rate, allowing you to
pocket most of those gains. However, in order to view the remainder of this
article, you'll need to subscribe to our premium income-investing
newsletter --
The ETF
Authority. After you subscribe, you'll
receive immediate access to this full article, as well as our
monthly
The ETF
Authority newsletter and a host of
additional premium content. Please visit one of the following
links to continue.
Good investing!
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Nathan Slaughter
Editor
The ETF Authority, Half-Priced Stocks
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in-depth guidance on today's leading exchange-traded funds (ETFs), plus
a proprietary ranking system designed to uncover today's most
profitable funds, please subscribe to
Nathan Slaughter's premium ETF investing newsletter -- The
ETF Authority |
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