Making Tax-Free Investments

Whenever a good investment comes along, the first two things that enter the mind of any good investor are ‘what a great deal!’ followed inevitably by ‘how much would I be paying in taxes?’ That’s when he thinks of you.

The prospect of not paying any taxes on investments has always been a wise choice for the world savvy investor, but what about the rest of the taxpayers?

Following are some ways to save your clients taxes while investing:

  • Buying municipal bonds. Your client does not have to report any interest they make off these as part of their income on any city, state, or federal taxes. The reason for starting these bonds was to get more people to invest in the government. Essentially, your client is allowing the use of their money by the government. There had to be a good incentive for people to choose to invest in municipal bonds, so the government made these bonds tax-free. Your client does not have to pay taxes on any income he or she derive from these bonds. This is especially profitable for those people who are in the higher tax bracket.
  • Purchase savings bonds. When your client invests in savings bonds, they can use the special U.S. Savings Bond exclusion, under which all or part of the income that they make off the saving bond is exempt. The following are some requirements for taking advantage of this exclusion:
    • Your client pays off their college tuition by cashing in their bonds.
    • Your client is single and/or filing separately
    • The maximum exclusion is for joint returns that don’t go over $79,650 and $53,100 for all other returns. The exclusion doesn’t exist for people who have a joint income of over $109,650 or single income that exceeds $80,000.
    • The bond must be in your client’s name.
  • Investing with a Roth IRA. Although your client does not get any deductions for the year in which they purchase a Roth, all withdrawals that they make, principal or income, thereafter is tax-free.

A little note for the folks who collect social security: it may be a good idea to invest first in a tax-deferred investment, then a tax-free investment. The reasoning behind this is that if a person who collects social security makes too much income off of a tax-free investment, the IRS will tax their social security receipts. However, the IRS does not count the income made from a tax-deferred investment until funds are actually withdrawn.