Financial Focus/Take Steps to Move Up Your “Tax Freedom Day”
submitted by Edward Jones
You won’t find it printed on your calendar. You won’t find it in the greeting cards aisle of the drug store. And you won’t find it celebrated with a TV special. Nonetheless, Tax Freedom Day may have a bigger impact on your life than many of the biggest holidays.
Tax Freedom Day isn’t an official holiday. It’s just the date on which average Americans can expect to start earning their first tax-free dollars of the year, after paying federal and state taxes. Tax Freedom Day generally occurs on a different date each year, depending on changes in tax laws and the health of the economy. In 2001, Tax Freedom day fell on April 29, but in 2002, it happened two days earlier, on April 27, according to the nonprofit Tax Foundation, which has calculated the date for the last 30 years.
Of course, Tax Freedom Day is really something of a fiction, because we all pay taxes throughout the year. If you’re an employee, you’ll have taxes taken out of all your paychecks. If you’re self-employed or a business owner, you probably pay quarterly taxes. Then, on April 15 of each year, you may pay still more taxes.
Nonetheless, the idea of a Tax Freedom Day is useful in understanding the relative size of your tax burden. And the good news is that you can help control when your personal Tax Freedom Day comes around. How? By becoming a tax-smart investor. Specifically, look for tax-free and tax-deferred investment opportunities.
Which investments are tax-free? Start by considering municipal bonds. The interest on these bonds is free from federal taxes; interest payments also may be free from state and local taxes, depending on the bond and on where you live. (However, municipal bonds may be subject to the Alternative Minimum Tax.) You’d have to find a taxable bond - such as a corporate bond - that pays a higher yield than your municipal bond to overcome the tax benefits offered by the “muni.” And in a low interest rate environment, such as we’ve been in for quite some time, you may have trouble finding high-quality corporate bonds that pay these potentially higher yields.
You’ll get the most benefit from municipal bonds if you’re in one of the higher tax brackets. But no matter what bracket you’re in, you may be able to take advantage of another tax-free investment - the Roth IRA. Now, thanks to recent tax law changes, you can put up to $3,000 a year in your Roth IRA. And your earnings will grow totally tax-free, provided you’re at least 59-1/2 when you begin making withdrawals and you’ve had your account for at least five years.
You also may want to look at tax-deferred investments, such as a traditional IRA or annuities. You can invest up to $3,000 a year in a traditional IRA. Your contributions may be tax-deductible, but even if they aren’t, your earnings will grow on a tax-deferred basis. If you’ve already “maxed out” on your traditional or Roth IRA contributions, and you still want to save for retirement, you may want to invest in an annuity. In addition to tax deferral, annuities offer you high contribution limits and a variety of payout options.
Before making any moves affecting your taxes, consult with your tax adviser. But don’t wait too long. The quicker you take action, the better chance you’ll have of bumping up your own Tax Freedom Day next year.
This article was submitted by the financial representatives of Edward Jones in Hagerstown: Greg Garner, 301-733-9465; Dave Walker, 301-766-7300; and Joan Bowers, 240-420-8514.