There are ways to save on taxes that can fit into a financial plan. Home ownership can help, especially if you buy in a good location at a good price, and stay put, at least for several years. You can deduct the interest you pay on your mortgage loan.
Financial advisers encourage investing in retirement plans, especially those offered by employers. If you are saving for retirement through an Individual Retirement Account (IRA) and/or work retirement plan (tax-sheltered annuity, 401(k), 403( b) , or 457) you get the triple advantage of tax-deferred compounding: the interest and dividends earned on your principal, the interest you earn on those interest and dividend earnings, and the interest you earn on the dollars you otherwise would have paid in taxes. These all grow and compound tax-free over the years. Taxes are due upon withdrawal in your retirement years when your tax bracket is likely to be lower.
The interest earned on municipal bonds is totally exempt from federal income taxes, and often state and local taxes as well. Congress has allowed this type of tax- sheltered investment opportunity to encourage investors to support the development of local and regional infrastructure – schools, roads, hospitals, libraries, sewer and water systems. Investors can buy into diversified pools of tax-free municipal bonds through mutual funds. As always, it’s best to consult a professional tax or financial adviser when considering tax-sheltered investments.
There are many ways to donate investments to your favorite charities and social change organizations that can provide tax deductions for you and allow you to continue to receive interest and dividends from the principal, or that will reduce the estate tax burden on your heirs.
Whatever your situation, you can be a responsible investor and let your values guide your investments. You can withhold money from businesses whose products or practices conflict with your values, and direct it toward low-income housing, minority-owned enterprises, renewable energy – whatever you want to support. Financial professionals can help you build a responsible portfolio.