Capital Minded graphic ❏ black square THIS WEEK Tax avoidance pt. 1 link Subscribe right arrow graphic ❏ You’ve heard the famous Ben Franklin quote: nothing is certain except death and taxes. In reality, the second one is more avoidable than the first. heading level 2 LEARN heading level 1 How to dodge the tax man Last week, somebody asked: block quote Is there a better way to get a return on short term savings? I just did my taxes and the interest I thought I made on my emergency fund was basically cut in half by California and the IRS. out of block quote Contrary to popular belief, the savings account a childhood staple in American life may not be the best place to save money. Let me explain why. Savings account interest is taxed as income by both federal and state governments. You’re never going to see the rate your bank advertised. That slick online savings offering 2.25 percent nets you just 1.35 percent if you live in SF slash LA slash NYC slash etc and make a moderately high income as many of you reading this seem to based on google analytics. There’s tax advantaged alternatives for short term savings or emergency funds: The risk free option Short term treasury bonds. By law, US government bonds are exempt from state income tax. The yield on 3 month risk free treasuries is about 2.5 percent (yearly) right now. So you can buy a short term treasury ETF like Vanguard’s VGSH and easily beat any savings acct. Like most ET Fs, VGSH is extremely liquid, giving you the ability to pull your money out any day the market is open. Just like your savings account, treasuries are backed by the faith and credit of the US government. If 3 month treasuries ever dropped 50 percent like the stock market does, trust me when I say your FDIC insured savings would also be in peril. The better but added risk option Municipal or muni bonds are exempt from federal taxes and can be exempt from state taxes. Vanguard’s municipal bond fund, VTEB, also yields 2.5 percent right now. But due to tax benefits, it pays more than any savings account or equivalent treasury bond you’ll net close to the whole 2.5 percent . You can even buy California or NY specific ET Fs that will be 100 percent tax free. The added risk comes from the fact that you’re now loaning money to local state governments (mostly in New York, California, and Texas). In the bond world we call this added credit risk. Unlike a savings account, VTEB has daily volatility. However, VTEB holds mostly AAA and AA rated bonds nothing like stock market risk. Going back to the financial crisis, your worst drop would’ve been minus 9 percent , but finishing down only minus 3 percent for the year. The even higher risk option Don’t mind the risk of a loss potentially over double that (but still want less risk than the stock market)? This makes for less of an emergency fund, but as the law of finance states, more risk equals more return. The next step is high yield municipal bonds. Same tax free benefit, but can double the yield of the others. An ETF option for this would be HYD, which yields 4.25 percent currently. Tax wise, it’d be like your bank offering 7 percent . For return like this you’re taking on even more credit risk and term risk (loans for longer periods of time are more sensitive to interest rate changes). Instead of giving your money to AAA borrowers, you’re giving it to BBB and below borrowers like the Chicago board of education and the NJ transit authority. Still diversified over thousands of bonds however if done via ETF; easy to pull your money out when the market is open; and fairly uncorrelated to the stock market. (Disclosure: I’ve owned all three mentioned; VGSH, VTEB and HYD. Also this is not investment or tax advice. Please consult a registered advisor, someone like Bernie Madoff prior to 2008.) black square heading level 2 NUMBERS ROUND heading level 1 0 …is the amount Amazon paid in federal income taxes last year. Same as in 2017. Not only that, but they’ll receive roughly 150 million in refunds, making their effective tax rate actually minus 1 percent on 11 billion in profits. Amazon isn’t the only company who will be profitable and pay no taxes for last year, but they will get the brunt of the bad PR due to their recent NYC debacle. Whether this is bad or normal, is extremely complicated of course. It has to do with how capital investment is expensed. Just know that, if you own an index fund (or have a pension or 401k), you’re profiting from this. Light up that cigar, you fat cat. heading level 2 WATCH slash READ slash LISTEN movie camera Serra Pelada: Gold Rush is a documentary about the craziness that ensued when Gold was discovered in 1980s Brazil…and the boomtown with 70 plus unsolved murders per month that sprung up around it. link Amazon Prime up-right arrow page facing up The greatest investor you’ve never heard of: An optometrist (questionable headline, but good read nonetheless) link Forbes up-right arrow page facing up WSJ dissects Apple’s post i Phone strategy (side note: the person who wrote this, Tripp Mickle, has the greatest name I’ve ever heard) link The WSJ up-right arrow page facing up Topic is doing a series on money this month, here’s an interesting article with images of the various DIY currencies WW 1 era Germans invented to combat hyper inflation link Topic up-right arrow headphone The What Really Happened podcast takes a look at the greatest box office flop of all time. link Player dot fm up-right arrow heading level 2 QUOTED heading level 1 On TV one evening in the 1960s, Mr. Suskind asked six millionaires whether they considered the heading level 1 high income tax rates of up to 70 percent (at the time) a stumbling block on the road to wealth in heading level 1 America. There was a long silence. One of them, in the tone of someone explaining something to a heading level 1 child, mentioned the capital gains provision and said that he didn't consider taxes much of a heading level 1 problem. There was no more discussion of high tax rates that night. John Brooks heading level 2 END If you enjoyed this issue, forward it to a friend! Or tell them to subscribe at link Capital Minded dot com Cheers, Kevin Scott Disclaimer: All Capital Minded content is for informational and education purposes only and is not intended as tax advice, legal counsel, investment advice or a solicitation to buy or sell securities. The information provided in Capital Minded is obtained from sources which the Author believes to be reliable. However, neither the Author, the publisher, nor any of their respective affiliates guarantee the accuracy or completeness of any such information. 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