April 30 is Tax Freedom Day. It's not a national holiday, and you won't find it on your calendar. But it can still be meaningful - if you use it as a starting point to review your own tax situation.
Tax Freedom Day is the date when average Americans will have earned enough money to pay their federal, state and local tax bills for 2007. Each year, the Tax Foundation, a non-profit tax policy research organization, calculates when Tax Freedom Day will occur. The date changes from year to year, based on changes in tax laws and the rate of economic growth in the country.
Of course, the idea of a day in which you have put taxes behind you for the year is fictitious. After all, if you work for a company, your employer typically withholds taxes from all your paychecks; if you are self-employed, you probably pay taxes every quarter. And yet, it's useful to think of Tax Freedom Day because it can push you toward making some important changes - especially in the area of investment taxes.
If you think you may be paying too much in taxes on your investments, what can you do about it? Here are a few steps to consider:
❚ Put more money into tax-deferred retirement accounts. If you have a 401(k), 403(b) or other employer-sponsored retirement plan, contribute as much as you can afford - and increase your contributions every time you get a raise. You generally fund your plan with pre-tax dollars, so the more you put in, the more you can lower your annual adjusted gross income. And your earnings grow on a tax-deferred basis, so you pay no taxes until you start taking money out of your plan.
❚ Look for tax-free investment opportunities. If you are in one of the higher tax brackets, you might benefit from owning municipal bonds. When you own municipal bonds, or "munis,'' your interest payments will be free from federal income taxes; if the municipality that issues the bond is located in your state, your interest payments also may be exempt from state and local taxes. (However, some municipal bonds may be subject to the alternative minimum tax.)
Your Roth IRA earnings are also tax-free, provided you don't take withdrawals until you are at least age 59 and a half and you've had your account for five years.
❚ Hold securities for the long term. Income taxes aren't the only types of taxes associated with investing; you also may have to pay capital gains taxes. That's why it makes sense to be a "buy and hold" investor. If you hold your stocks for more than one year before selling them, your gains will only be subject to a maximum capital gains rate of 15 percent (effective through Dec. 31, 2008). But if you sell your stocks within a year of buying them, your gains will be taxed at your ordinary income tax rate.
By following these suggestions, and by consulting with your tax advisor, you may be able to speed up the date of your personal Tax Freedom Day. And, at the same time, you might also quicken the pace toward achieving your long-term financial goals.
Sarah Taylor is a financial advisor at Edward Jones. [[In-content Ad]]
