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Across My Desk: Taxes



If you've not done your taxes yet,and want to make sure you don't make any mistakes in the process, Sue Stevens, CPA and director of Financial Planning for Morningstar offers the following suggestions in a recent Morningstar publication:

Don't Miss Out on Deductible Tax - and Investment-Related Fees

If you itemize your deductions on Schedule A, don't forget to deduct investment- and tax-related items like investment advisor fees, subscription costs of investment newsletters (such as Morningstar Practical Finance), custodial fees (as long as you paid them separately), and tax advice and preparation fees, including electronic filing fees. To be able to take advantage of these miscellaneous itemized deductions, they must total more than 2% of your adjusted gross income.

Watch Those Capital Gains and Losses

When selling an investment for less than you paid for it, you can realize a capital loss. The bright side is that capital losses can help you save on taxes. You can use capital losses to offset--or net out--capital gains in your portfolio.

Capital losses are deductible dollar-for-dollar against capital gains. In addition, individuals may deduct up to $3,000 in capital losses each year against their taxable income.

You'll need to know if your gains and losses are short-term or long-term. If you held an investment a year or less, it will be a short-term gain or loss. If you held an investment longer than a year, it will be a long-term gain or loss.

In general, short-term capital gains are taxed at ordinary income-tax rates from 10% to 35%. Long-term capital gains, meanwhile, are taxed at lower, preferential tax rates from 5% to 15%. (Higher capital gains rates apply to collectible and unrecaptured 1250 gains--see IRS Publication 550.)

Learn When Muni Income Is and Isn't Exempt

If you own municipal bonds, interest income you receive is exempt from federal income tax. That income may or may not be exempt from state income tax. If the bonds are issued in your state of residence, you usually won't have to pay state and local taxes on the interest. You can find out for sure by contacting your state or the brokerage company where you hold your securities.distributions, check the 1099 forms you received.

Exclude Interest from U.S. Government Securities

Don't forget to exclude the interest from government securities from your state income tax return. You can exclude all income from "direct" government securities (e.g., Treasuries). Some states also allow you to exclude income from "indirect" securities (e.g., agency bonds like GNMA and FNMA securities). To know for sure, contact your state or the brokerage firm where you hold your bonds.


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