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Income Tax Planning For Investments

The 2001 Tax Relief Act can help increase an investor’s total investment pool and the proportion they hold in tax-deferred accounts. This may affect what investments the investor holds, and where. Consider these thoughts:

· It's generally preferable to have investments that pay steady ordinary income, such as bonds, in tax-deferred accounts and own stocks and equity-like (stock mutual funds) investments personally. What matters in tax-deferred investing isn't taxes saved but net overall return after taxes. Investment earnings after taxes should at a minimum outpace projected inflation.

· Tax-exempt bonds become comparatively less attractive as tax rates fall. Individuals that hold municipals should be in the 27% federal tax bracket (2002) or higher for it to make sense investment-wise.

· The new law reduces ordinary income tax rates but not capital gains tax rates. That might make capital gains investments a bit less valuable, since the spread between ordinary and capital gains income has diminished. But another provision becoming effective in 2001 (not part of the 2001 Tax Act) provides an 18% rate for capital assets acquired after 2000 and held for 5 years. It's possible, at some tax cost this year, to treat assets you owned at the start of 2001 as assets acquired this year, to qualify for the 18% rate on sale after 2005. A discussion with a Legend advisor is warranted here.

· A familiar family tax saving technique is to transfer some investments to children age 14 and over (being careful about gift taxes) again, discuss this with your Legend advisor. This shifts the investment earnings to a lower tax bracket. The new law's 10% bracket means that a single taxpayer pays a tax of $600 on the first $6,000 of taxable income. Also, for investments held five years or longer by a 10% or 15% federal tax bracket individual even if sold in 2002, would be taxed at a capital gains tax rate of only 8%.

For further information, contact Louis P. Stanasolovich, CFP™ at (412) 635-9210 or

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