Tip of the Week: Evaluate Your Investments After Taxes (5/24/99)

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	Investments, After Taxes Financial Tip of the Week by Deloitte & Touche OnLine May 24, 1999

When you sell an investment, how much do you get to keep?

See our archive of previous tips on your money, your taxes and your financial plan.

The maximum tax rate on gains from property you hold for longer than 12 months is 20 percent, for sales after December 31, 1997. (There are different, more favorable rules for small business capital gains, and less favorable rules for collectibles and certain real estate.) Ordinary income is taxed at a maximum rate of 39.6 percent. It is likely that you will be in different tax brackets in different years. Except for municipal bonds, which are generally tax-exempt for federal and state purposes, most investment income will be subject to income tax at some point. For example, the interest on passbook savings accounts is taxed annually, and the appreciation in the value of a stock is taxed when the stock is sold, while dividends are taxed annually.

When you evaluate investment options, you should consider investment issues such as risk and asset allocation. And you should certainly consider the effect of income taxes. Generally, income taxes will decrease your investment return, although their effect will differ at various times. To be sure you are comparing "apples with apples," evaluate the performance of investments on an after-tax basis. This lets you make valid comparisons among investment options.

Chapter 7 of our Tax Planning Guide looks at the tax rules that affect investments and investment returns.