An index fund is a mutual fund that owns all the stocks in a particular index.  The index could be the S&P 500, the NASDAQ 1000, the MSCI EAFE, or any of a hundred other indexes.  If you want your portfolio to have 80% domestic stocks and 20% international, then you could invest those proportions in two index funds.  This would instantly give you diversification across hundreds of underlying stocks.  Exchange traded funds (ETFs) are essentially the same thing, but they are considered slightly differently for tax purposes.  They are considered baskets of stocks instead of many individual stocks.  To me this is splitting hairs, but I’m sure it’s making investment companies buckets of money.  Let’s see if an ETF does us common folk any good.

Let’s compare two scenarios: investing $10,000 in an ETF vs. and index fund.

(Warning: Plot Spoiler: A good index fund is as good as an ETF; however, not all index funds are made the same.) Read the rest of this entry »

Tags: ETFs, index funds, tax efficient funds

One of the best tax deductions is a donation to charity.

There is a saying that heating with wood warms you twice:  once when you chop the wood, and once when you burn it.  Similarly, a donation to charity makes you feel good for supporting a worthwhile cause, and it puts a little lettuce back in your wallet.

Unfortunately, charitable donations are only deductible if you itemize.  If you don’t itemize, I’d still encourage you to contribute, because organizations need your help today more than ever.  I believe that the primary consideration in whether to spend money should be whether it makes your life more meaningful — not just what minimizes your taxes.

Nevertheless, if you can take the tax deduction, then let’s discuss how to maximize it. Read the rest of this entry »

Tags: capital gains, charitable deductions, ETFs, exchange traded funds

Over the last few years, more companies are giving restricted stock instead of stock options as incentives for key employees.  Accounting practices began requiring stock options be recognized as an expense, hitting the bottom line of corporate balance sheets.  As a result of the shift, more employees now need to deal with the tax implications of restricted stock. Read the rest of this entry »

Tags: capital gains, restricted stock, tax return

Employee stock purchase plans (ESPP) enable employees to buy company stock at a discount.  The details can vary for each company, so please consult your company’s ESPP documents for your particular situation.  I was recently asked how to calculate taxes for stock sold from the Varian Semiconductor (VSEA) ESPP, so I’ll use this company as an example.  Many companies use a similar plan. Read the rest of this entry »

Tags: capital gains, Employee Stock Purchase Program, ESPP

Mutual funds typically pay dividends at the end of the year.  (Ok, maybe not this year.)  And you pay tax on those dividends.  Many investors reinvest the dividends by buying more shares.  When it comes time to sell, remember to include the dividends (that you’ve already paid tax on) in your basis value.  This will lower your capital gains, reducing your tax.

Tags: capital gains

For those individuals in the 10-15% bracket for federal income tax, your capital gains tax rate was 5% in 2007 and dropped to 0% in 2008.  Just be careful that the capital gains don’t push you into a higher tax bracket.  Of course this is if you’re lucky enough to have capital gains in this lousy market.  For the rest of us, remember that the maximum deduction for capital losses is $3,000 ($1,500 if married filing separately).  Capital losses in excess of the deduction may be able to be carried over to future tax years.

IRS Pub 1040 Schedule D Instructions p. 2 and NPR.

Tags: capital gains, capital losses