Tax Considerations

When investing, it is important to understand the associated tax implications. In general, tax issues revolve around investment income and capital gains. We will break it down for you so that you understand the important elements.

Note: our advisors can walk you through general tax considerations for your portfolio. For complex situations, we offer expert referrals and advanced planning strategies for our wealth management clients.


Not all income from investment is treated equally when it comes to taxation; some investments have a "tax advantage", meaning that they are either exempt from taxation, or offer other tax benefits like a reduced taxation rate.  These can be used to reduce the investor's tax burden at tax time, allowing them to keep more of the profits from their investments.  Depending on tax rates, an investor may even be better off with a tax-advantage investment that has a lower rate of return instead of a higher return investment that gets taxed as regular income.

Each tax advantage investment is best for a different type of investor, so it is good to be familiar with the options.


The interest on many government bonds may be tax advantaged.  Most municipal (Muni) bonds are exempt from federal taxes, and often exempt from state and local taxes as well if the purchaser is from the state where they were issued, making them "triple-tax-free".  Some Muni bonds are taxable if they are issued for the purpose of funding a project without major public benefit, but even so they may receive special tax credits or subsidies.  Treasury (US federal government) bonds are exempt from state and local taxes, but subject to federal taxes.

Bonds are popular with high net worth investors looking for a reliable source of income, and regular investors looking for safe investment vehicles.

Capital Gains

Time figures prominently in many investment strategies, and part of the reason is due to the tax advantage that comes from capital gains.  Short-term investments are those held for less than a year, and are taxed at the investor's normal income tax rate, but long-term investments held for more than a year are taxed at a much lower capital gains tax rate.  The capital gains tax rate varies by income, from 0% for those in the 10% and 12% income tax brackets, to 20% for those in the 37% income bracket.

The capital gains tax advantage benefits any investor who holds an investment for more than a year.

Exchange Traded Funds and Dividends

Due to the manner in which they are constructed, ETFs are only taxed when they are sold.  By contrast, mutual funds incur interest every time assets within the mutual fund are sold, subjecting mutual fund investors additional taxes even if they hold the same mutual funds for many years.

Additionally, dividends, whether received through an ETF or individual stock ownership, are taxed at a lower rate provided that the dividend meets certain conditions.  Investors who own a stock or ETF from an American company that has not been disqualified by the IRS, and held it for more than 60 days around the time the dividend was paid, qualify for a lower capital gains tax rate.

Retirement and Educational Savings

Special retirement and educational savings accounts both offer tax advantages.

Traditional 401(k) and IRA plans allow the investor to deduct their contributions from their annual taxes.  The money is only taxed when that money is later withdrawn, hopefully at a lower rate than when the investments were made.  For individuals who expect to be in a higher tax bracket upon retirement, a Roth retirement savings account may be more appropriate.  A Roth account can even be used to gain tax advantage on investments which are otherwise not tax advantage, like short-term stock holdings, taxable bonds, or REITs.

Similarly, both 529 and Coverdell educational savings accounts are tax advantaged, allowing contributions to be deducted when deposited, and only taxed when the money is withdrawn.  Some states also allow 529 plan contributions to be deducted from state taxes .

Unsure of the best way to incorporate tax advantage accounts into your investment strategy?  We can help.