Tax Favored Investments that Savvy Investors Need to Consider (2024)

Savvy investors know how important it is to thoroughly research investment options before making any final decisions, and a lot of focus gets placed on finding the right stocks, lowering fund management fees, and passive investment strategies for long-term capital preservation. While these are good strategic moves, how much time do you spend researching tax favored investments? Surprisingly, tax favored investments make up an entire universe of products that lend investors more options to diversify their portfolios. Tax favored investments allow you to lower the tax burden of investing in traditional bonds and offset the cost of capital resulting from earnings on stocks.

Some investors chart their own investment strategies while others hire financial advisory services. Either way, if you’re laying out an investment allocation plan for a diversified portfolio, it is good practice to keep in mind how these decisions might impact your yearly tax bill. The rate of return (ROR) you get on your equity positions should be favorable after calculating your combined tax liabilities.

Tax-exempt and qualified tax-credit bonds

Tax-exempt municipal and state bonds allow investors to invest in a wide range of fixed income products without the burden of taxes normally associated with interest payments they receive.

There are two types of municipal (“muni”) bonds: general obligation bonds and revenue bonds. General obligation (GO) bonds are the most common type of tax-exempt bond. Municipal governments get approval from taxpayers to issue bond certificates to the public. The bonds are lower risk because authorities have the power to raise taxes, when necessary, to fulfill obligations to the bondholder. The other type is revenue bonds. Governments issue revenue bonds to fund projects intended to generate revenue for the issuing city or state entity.

Qualified tax credit bonds offer investors valuable tax credits when they invest in school construction, energy conservation, and renewable energy.

Tax-managed funds

Unlike tax-exempt muni bonds, tax-managed funds are separately managed account (SMAs) which contain multiple holdings that balance risk, taxes, and capital gains. They contain varying percentages of stocks and bonds for a tax favored investment portfolio. The fund manager’s goal is for their investors to have a low tax bill whenever they are ready to redeem their positions.

Qualified opportunity zones (QOZs)

One of the provisions of the Tax Cuts and Jobs Act (TCJA) is qualified opportunity zone (QOZ) investing. The government identifies qualified opportunity zones as economically depressed areas of the country that need revitalization. They provide guidelines to corporations and investors on how to receive deferred tax incentives when they work with cities on real estate improvement projects and creating new businesses in low-income neighborhoods.

Qualified small business stocks (QSBS)

The IRS has also created a unique provision for qualified small business stocks (QSBS). Corporations worth less than $50 million before issuing stock and have under a $50 million market value at initial public offering fall within a special tax incentive bracket. Depending on how investors time their stock purchases, it gives stockholders tax-free gains on income if they hold the stock for five years. If they sell before the five year window, then they receive tax-deferment status when they invest in another QSBS corporation. Check out the SBA blog page to learn more about how this works.

Tax Benefits of Angel Fund Investing

Angel funding attracts high-net worth individuals that want to gain a higher return on investment (ROI) than they would by investing in traditional investments or even hedge funds. They choose start-ups that show a strong potential for becoming highly successful. Not all angel fund investments have tax-incentives associated with them. If you want the tax incentive and the higher rate of return, be sure to hire a tax attorney and do complete a thorough vetting process before writing a check. The government may offer incentives to energy renewables and companies.

Tax-Friendly Investment Strategies

Creating a portfolio of tax favored investments takes time, knowledge, and experience. Choose a wealth management team that has spent decades on investments and taxes. As you accumulate wealth over time, you can benefit from having a partner that can help you to manage how your investments will be taxed over the next several years long-term. SD Mayer, in the San Francisco financial district, specializes in helping high net worth individuals and families achieve their financial and life goals.

When you have a fully integrated wealth advisory, tax, and accounting firm working with you, it smooths out a lot of the decision making. SD Mayer wealth advisors have decades of combined experience, and can help you create a tax favored investment strategy that will fit seamlessly into your financial plans. Whatever your goals are, holistically managing your wealth is essential. To learn more about how to do this, contact us to set up an initial consultation.

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