My Favorite Way to Beat the Obama Tax Increases

[axafiiki]

Many successful investors will be in for a shock during tax season this April. There is nothing worse than having a banner year in the financial markets, then having to give a large portion of it to Uncle Sam in the form of taxes.

Frankly, I'm concerned that this year, the pain is going to be even worse for those winning investors who have failed to prepare themselves for the new era of higher tax rates.

Here's what the new tax laws mean to you
If you are in the top tax bracket, meaning you earn more than $400,000 (or $450,000 for married couples), then your marginal tax rate has jumped to 39.6% and the rate on long-term capital gains and dividend interest increased five percentage points to 20%. A new 3.8% tax related to the Affordable Care Act (more commonly known as "Obamacare") and a 0.9% Medicare surtax are also going to hit taxpayers who make more than $200,000 (or $250,000 for married couples) in modified, adjusted gross income.

[Benma]

That's why it's important to design your investment portfolio in the most tax-efficient way, even if you are under this threshold. Investing within a retirement account and diversifying into tax-advantaged instruments is the primary way to lessen your tax burden.

And one of the most widely used tax-exempt instruments in the market are municipal bond funds.

Although tax-exempt municipal bonds yield less than taxable bond funds, they often make more investing sense because of their tax ramifications.

[BeverlyLat]

Municipal bonds, also known as munis, are debt instruments issued by public entities like cities, states and counties, which use the proceeds to fund various public works projects such as roads, schools and power plants. These bonds can be based on revenue or general obligations. Revenue-based bonds (http://bit.ly/10UpVfK) are issued by non-profit and public-service organizations like utility companies or hospitals, rather than the government. They are dependent upon the revenue of the specific projects they are created to fund. In contrast, general-obligation bonds (http://bit.ly/VlILtM) are backed by the government issuer, which can allocate or increase taxes to assure the interest is paid and principal is returned.

Why do munis make sense now?
The short answer is because the interest earned from owning municipal bonds and municipal bond funds is generally exempt from federal income taxes. In addition, depending on the issuer, they can be exempt from state or local taxes.

With all this information in mind, here are two of my favorite municipal bond investments...