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The average American pays more for taxes than food, clothing and housing combined1. Without the proper planning, investment earnings can make your tax burden even heavier.Higher total return potential
For investors in the highest federal tax bracket, taxes can reduce an 8% annual return to as low as 5.2%. Over time, that may mean the difference between reaching a financial goal and falling short.The power of tax-advantaged compounding
Investment earnings within IRAs, 401(k)s, annuities and certain education accounts are not subject to current year taxes. Because money that would otherwise go toward taxes remains in your account, it has the potential to compound and grow faster for the future. Depending on the account, taxes are either deferred until qualified withdrawals begin or eliminated altogether. Your financial advisor can tell you more.Favorable tax rules
Under current laws, tax breaks that were set to expire in 2011 have been made permanent. This allows you to avoid federal taxes on qualified withdrawals from 529 college savings plans and to make higher contributions to employer-sponsored retirement accounts and IRAs.
1 Source: Tax Foundation, 2010
2 For investors in the two lowest tax brackets, the tax rate on qualified dividends is 0% through 2012.
If your advisor recommends it, consider realizing investment losses before year-end to reduce capital gains taxes.
When donating an investment to charity, you can generally take a tax deduction for the full market value, meaning you avoid capital gains taxes on any appreciation.
Interest income from municipal bonds is not typically taxed by the federal government or state in which a bond is issued.
While interest income is taxed at rates as high as 35%, taxes on qualified dividends top out at just 15% through 2012.2
Contribute as much as possible to tax-advantaged accounts for retirement or education. If you're 50 or older, you can make additional catch-up contributions to employer-sponsored retirement plans and IRAs.
Investments sold at a profit after more than one year qualify for favorable tax rates as long-term capital gains.
A financial professional or tax advisor can tell you if these or other strategies meet your individual needs.
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The information above is not intended to provide and should not be relied on for accounting, legal and tax advice or investment recommendations. The views and strategies described may not be suitable to all readers. Please contact your financial professional or tax advisor for additional information.
IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.