your “cost basis”; that will reduce the amount of tax you’ll owe.
Let’s say you invested $10,000 in the Great Growth Fund a few years ago, and you sell your shares this year for $20,000. That’s a $10,000 gain, right? Not necessarily. If you’ve reinvested $2.000 worth of dividends and capital gains distributions over the years, your cost basis is $12,000–not $10,000–so your taxable gain is $8,000 instead of $10,000. If you neglect to make this calculation, you’ll wind up paying taxes twice on reinvested distributions.
Good record keeping also comes in handy if you’re selling part of a position. For example, you decide to sell $10,000 worth of your $20,000 holding in Great Growth Fund. You can specify exactly which shares you wish to sell by notifying your broker or fund family in writing. Note the date the shares were purchased and the purchase price, then insist on getting a confirmation statement that you asked to sell specific shares. If you specify the highest-cost shares for sale, you’ll reduce your tax bill.
Buy individual stocks, particularly if you’ve amassed several mutual funds. If you buy stocks directly and hold on to them, you won’t have to worry about receiving unwelcome capital gains distributions. “Buying stocks directly is not for beginners, but people who know what they’re doing can cut their taxes and increase control over their investments,” says Willock.
Give away appreciated securities. The holiday season is probably a good time to do so; you’ll have a better idea of what your income is and what your tax obligation will be for the year. “Many black people give heavily to charity, especially their churches,” says Bolton. “I tell them that if they donate cash on which they’ve already paid tax, they’re giving away expensive money.”
Instead, give away stocks or mutual fund shares that have gained in value. “The char
ity will get full value and you’ll get a full write-off, while your capital gains tax obligation disappears,” explains Bolton. To implement this strategy, call the charity and get its broker age account number. Then, call your own broker or your mutual fund company and explain what you want to do, providing the account number. Follow up by fax or phone to confirm the transaction.
For the bonds in your portfolio, use municipal bonds or municipal bond funds. Interest is exempt from federal income tax and, in some places, even state tax. “Municipal bonds make sense if you’re in a 28% tax bracket or higher,” says McEvilley. That is, if your taxable income is expected to be greater than $25,000 in 1997 ($40,000 on a joint return), you’re a candidate for municipal bonds or funds-also known as “munis.”
Suppose you can earn 7% in a taxable bond fund. After federal income tax, you’d net 5.04% in a 28% bracket, or 4.83% in a 31% bracket. As such, you’re better off earning 5.5% in a tax-exempt bond fund. “Investors in high-tax states such as New York or California may prefer to buy single-state funds to avoid state