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Capital gains
or not? In order to encourage investment, the government taxes capital gains
at a lower rate if you hold them for a certain period. But not all accrued value
is capital gains. For instance, even though you might buy a zero coupon bond at
a discount and redeem it for much more money, the increased value is interest,
not capital gains, and is usually taxed as regular income.
Tax breaks. Some investments, especially funds set up for
retirement, provide several ways to shelter your money from taxation.
Tax-deferred investments allow funds to build up tax-free in your
investment; you pay taxes on your earnings only when you take them out as cash.
Other plans permit pre-tax investment—that is, the amount of your income you
invest is not subject to tax. Still others permit you to deduct a portion of
your invested funds from your income for tax purposes.
Regulations. Knowing the current state of the tax code
regarding investment earnings is a full-time job. With some investments, you
must pay tax on your earnings, even though you cannot use them as income. In
some instances, a portion of your earnings will be taxed one way, another
portion in a different way. Unless you want to spend lots of time reading IRS
publications, you should plan to get expert advice—advice you will have to pay
for and factor into the cost of your investments. |
