Investing for Your Tax Bracket

Any time you engage in any type of investing, you always have to take into consideration the tax bracket you could land in based on your anticipated earnings, hence the importance of tax planning around your estimated or potential income. When you consider the fact that the purpose of tax planning is the minimizing of your federal tax liabilities (and state if applicable), you can understand the importance of investing for your tax bracket. There are a number of ways you can successfully achieve this and stave off your income tax liabilities.

In most cases, individuals are always searching for ways to reduce their taxable income. The 2 most common ways are deferring income (401k deductions at work) or family member gifting. However, deduction planning, income tax bracket planning, and planning strategies for year’s end should all be considered if you want to decrease your tax liability overall. The following 5 suggestions help where investing in your tax bracket is concerned.

To minimize current tax liability, postpone your income – deferring some of your income to a later year is a great way to decrease your tax liability for the current year. One of the best examples of this practice is employer sanctioned 401(k) deductions where your tax liability is reduced because the deduction comes off of your pre-tax income. The money you contribute to the plan is not taxable until you withdraw the funds from your 401(k).

If you want to lower the overall family tax liability, shift some of the income to other members of the family – this technique is oftentimes referred to as gifting and greatly decreases income tax liability. As an example, if you have achieved a good return on a stock, you might want to consider giving that stock to your children. You can gift up to $11,000 annually.

Focusing on your after tax return and timing strategies are the key – lowering your overall income tax liability using wise investment avenues is what investing for your tax bracket was designed to accomplish. There are numerous strategies such as investing in only securities that you know are tax exempt and employing timing strategies for when it is right to sell off your capital assets at the right time.

Deduction planning entails having control over your income and proper timing – the primary goal of deduction planning is lowering your income tax liability by using allowable deductions. If you can prove that you are entitled to a deduction, take it! Make sure that you time those deductions as efficiently as possible.

You can focus on a marginal tax bracket by employing certain year-end planning strategies – by November or December, you should have your year-end tax planning strategy in place so that by tax time, you get the benefit from it. It involves timing your taxable income so that you fall into a lower tax bracket, therefore having a lower tax liability to deal with by April 15th. Accelerate your current year’s deductions wherever you can and postpone as much income as possible.

Investing like Warren Buffett

For those of you who are not familiar with the name Warren Buffett where the investment world is concerned, you should educate yourselves as to who the man is and why he is revered among many investors as the “Oracle of Omaha” or the “Sage of Omaha.” Buffett is a businessman, philanthropist, and most significantly, a US investor that is one of the most successful in the entire world.

Additionally, he is the CEO and primary shareholder of Berkshire Hathaway, a conglomerate holding company located in the US Heartland city of Omaha, Nebraska. For the last 40+ years, Berkshire Hathaway shareholders have witnessed and benefited from an annual book value growth of 20.3%. Despite a negative 11.3% return overall on the S&P 500 between 2000 and 1st quarter of 2010, the company produced a 76% return to its investors.

So what has made Warren Buffett so successful in his investment endeavors? Brains, common sense, and timing, to put it simply. The real story is that he originally focused on long-term investments early on in his career. However, he has now shifted his focus in recent years and has started purchasing whole companies. He now owns a wide array of businesses including:

• candy production
• encyclopedias
• home furnishings
• import and distribution of footwear
• jewelry sales
• manufacture and distribution of uniforms
• manufacturing firms
• newspaper publishing
• railroads
• vacuum cleaners

In addition to the above, he also owns several regional utility companies, both electric and gas. Here are 10 tips for how to be successful by investing like Warren Buffett:

1. whenever you purchase even a single share, buy it just like you would the entire company
2. the most recent investment heresy is that market volatility equals risk – it is totally the opposite
3. where growth vs. value is concerned, value must include GARP (growth at a reasonable price)
4. don’t concern yourself with emerging markets, exotica that is difficult to appraise, high technology, leveraged buyouts, and real estate
5. never invest in bad industries because turnarounds typically don’t work
6. look at companies that generate sufficient cash for investing in higher rates of return over longer periods of time
7. just because a stock doubles doesn’t mean that it is time to sell it
8. beware of the “corporate folly” of offering their under-priced stocks for the full value presented by an acquisition candidate
9. long-term bonds are a plague and should be avoided like one
10. if you’re going to be successful as an investor, you have to be a fanatic just like some retail company manager would be

Whenever you start investing, remember that it is a matter of principles and techniques, and Warren Buffett’s are second to none. His track record of success and the fact that as of the date of this article, the man’s net worth is $51 billion should be testament enough as to the 10 tips listed above.