‘Tis the season to take advantage of taxes, says a WFU professor

While trimming the tree and tying the bows on holiday packages, a Wake Forest University tax professor says a little planning now may trim the amount you owe come tax time and tie your money into wiser investments.

“The recent election results will likely mean more tax cuts on the federal level, but tax rates will continue to go up at the state and local levels,” says Ralph Tower, Wayne Calloway Professor of Taxation at Wake Forest University’s Calloway School of Business and Accountancy. “Taxpayers should have a heightened awareness of this and how it may affect them individually.”

Tower, who has taught taxation at the Calloway School for 22 years, says one way to counter the state and local tax raises would be to make wiser investments on a federal level. He says municipal bonds, or other tax-free investments, can be a wise choice in today’s market because they often yield higher interest rates than taxable securities. “It’s a world turned upside down for investors because taxable securities typically have a more attractive yield,” Tower says. “But now their return is less – and you’re getting taxed on top of it.”

Tower says it is important to note that tax-exempt securities are not always exempt on the state level. Investors should learn the rules in their home state before deciding on an investment.

Tower also sees an advantage to selling assets with potential capital gain that can be offset by investment losses from previous years. The maximum an individual can claim in capital loss for federal income tax purposes each tax year is $3,000. Tower says that with the downfall in the market, many people have losses that exceed that limit. The excess is then carried over to the next year. By selling assets now, the income from those gains can be offset by previous losses, resulting in tax-free gains. It is also possible, Tower says, to then repurchase particularly attractive investments.

“The main thing to remember is that a little forethought and action can save money down the road come tax time,” Tower says. “Talk to your financial advisor to determine what may benefit your situation best.”

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