September 2011 Client Profile

Olivia is planning on making some investment transactions but is worried about the possible tax consequences.

Before Olivia makes any investment-related decisions, she needs to consider several factors. First are capital gains rates. If Olivia sells stock or mutual fund shares, the profits earned are taxed as capital gains. Gains earned on securities held more than one year before sale ("long term") are generally taxed at 15%. However, if she sells her securities before she's met the long-term holding period, her gain could be taxed at ordinary rates as high as 35%.

Olivia should also consider the timing of mutual fund purchases. Before capital gains are distributed during the last quarter of the year, they are reflected in the fund's net asset value. So if Olivia bought shares just before the fund went ex-dividend, she would have to pay the fund for the distribution she was about to receive and report the "gain" on her tax return. Waiting until after the ex-dividend date to make her purchase could help Olivia avoid the extra taxable income.

Another factor for Olivia to consider is dividend rates. For dividend income to qualify for preferential tax rates, she must hold the underlying stock for a specified holding period (generally, for more than 60 days during the 121-day period beginning 60 days before the stock's ex-dividend date).

Municipal bond interest should be considered, too. This interest isn't always exempt from federal income taxes. Interest earned on certain "private activity" municipal bonds has to be included in Olivia's income when figuring her potential liability for alternative minimum tax (AMT).

Minimizing taxes plays a role in many investment decisions. While tax avoidance should not drive your investment decisions, you should consider the tax consequences.

_{Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.}