Your Most Important Tax Savings This Year

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
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According to Americans for Tax Reform, a nonprofit taxpayer advocacy group, since taking office in 2009, President Obama has formally proposed 442 tax increases.

That does not include the 20 tax increases he signed into law as part of the Affordable Care Act.

If you're a high-income earner in this country, you now face a 39.6% top marginal income tax rate, plus an average 6% state income tax, plus Social Security taxes (both sides if you're self-employed), plus uncapped Medicare taxes. Your state and federal government can easily take the majority of what you earn.

However, these are just the taxes on your earned income.

President Obama also raised the top short-term capital gains tax rate from 35% to 39.6%. He raised the top long-term capital gains tax rate from 15% to 20%. He raised the top tax on dividends from 15% to 39.6%. (There is also an additional 3.8% tax on dividends to pay for Obamacare.) And he raised the estate tax rate from 35% to 45%.

You have to give the government high marks for thoroughness. They tax you when you earn it, when you save it, when you invest it and when you spend it. When you die, they tax what's left over.

Any questions?

Fortunately, you have a legal right to minimize what the government takes.

Only What the Law Demands

As Judge Learned Hand famously wrote, "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes... Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands."

So what steps should you take? Start by tax-managing your portfolio. That means taking these five specific steps:

  1. Outside your retirement accounts, shift all or most of your Treasury and corporate bonds to municipal bonds. They will compound tax-free.

  1. Do your short-term trading in your IRA or other qualified retirement accounts. That way, instead of paying taxes of up to 39.6% on realized gains, your money will grow tax-deferred.

  1. Outside your retirement account, hold your stocks for 12 months or more to qualify for more favorable long-term capital gains tax treatment.

  1. Hold your tax-efficient assets - like individual stocks, ETFs and index funds - in your non-retirement accounts. Hold your tax-inefficient investments - like bonds, real estate investment trusts (REITs) and high dividend paying stocks - in your retirement account. This minimizes the annual tax bite from the IRS.

  1. At the end of each year, take capital losses to offset realized capital gains. (You can buy the same securities back after 30 days.) And when possible, take an additional $3,000 in losses against earned income. Any unused losses can be carried forward for use in future years.

The Oxford Club's Pillar One Advisor Mike Kuschmann suggests another effective tax-saving idea: investing in fine art and giving it to a charity.

The 1995 Tax Act allows you to donate works of art at their fair market value, not at their cost basis. (The IRS requires you to hold these items for one year in order to donate them at their assessed value.) And you don't need a lot of money to get started.

Mike is a former lecturer at the Stanford Business School and President of Fine Arts Limited. (He has also authored two books on investing in art.) For more information, feel free to call him at 800-229-4322 or 407-702-6638. He'll send you a complimentary brochure pack, detailing his services and the tax savings available.

The important thing is to recognize and take advantage of the incentives built into the tax code. The savings can be substantial.

Remember, it's not how much you make. It's how much you keep.

Good investing,


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Tax-Advantaged Income and a Huge Global Need

Regular readers know that one of our favorite types of tax-advantaged investments is the master limited partnership, or MLP.

An MLP trades like a typical dividend-paying stock, but carries tax benefits that many investors know little about.

"MLPs offer investors tax-deferred dividends that are generally larger than anything you'll find in the realm of blue chips," Marc Lichtenfeld explained. "An MLP investor is technically a partner in the company, not simply a shareholder. That fact changes the way Uncle Sam treats the dividends."

That's because the payouts are treated as "distributions" rather than dividends. "As far as the IRS is concerned, investors are simply getting some of their own money back," Marc explained. "That's key because we don't pay taxes on a return of capital."

But there's a hitch. Most MLPs are in the energy sector, which makes them vulnerable to sliding oil and gas prices.

However, one of Marc's favorites is Brookfield Infrastructure Partners (NYSE: BIP), which (as the name suggests) is in the infrastructure business.

And you may have noticed that America's infrastructure needs a little work. The American Society of Civil Engineers gave U.S. infrastructure a "D+" rating and estimates we need to invest $3.6 trillion in it by 2020.

Marc updated us about Brookfield in May. "Funds from operations (FFO), which is a measure of cash flow, is the most important metric when evaluating an MLP[...] In the first quarter, Brookfield's FFO grew 16% to $186 million or $0.89 per unit. FFO increased due in part to the expansion of Brookfield's Australian railroad and more business on the railroad, as well as higher volume in its natural gas transport unit."

Brookfield's guidance is cautious but its prospects are bright. "Brookfield's goal is to grow the distribution 5% to 9% per year. However, this year, it exceeded that goal with a 12% hike in February. Last year, the company paid out $0.43 per unit quarterly."

A regular and growing income stream from a solid company in a business with a huge global need... and tax benefits. What more could you ask for?

- Bob Keaveney with Marc Lichtenfeld

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