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$ I NVESTORS NEED TO consider many factors when choosing investments. One at the top of list is an investment's tax cost. The following are some points to consider about the tax efficiency of stocks and bonds. Effective Jan. 1, 2013, Congress implemented a new Medicare surtax of 3.8 percent on net investment income. The tax affects taxpayers with modified adjusted gross income in excess of $200,000 for single individuals and $250,000 for married couples. The appeal of some of these investments may change, depending on whether you are subject to this additional tax. Stocks If your goal is tax efficiency, consider stocks geared towards growth and that have a low-dividend yield to reduce your current taxable income. The growth is tax-deferred until you sell the stock. This ability to defer tax provides some flexibility because you can manage your gains and losses based on when you sell your stock. If you hold the stock for more than one year, the gain will be eligible for a lower long-term capital gain rate, as opposed to the ordinary income tax rate. If you need an income-producing stock, consider one that will pay dividends that qualify for the reduced qualified-dividend rates versus ordinary income rates. The rate for qualified dividends is the appli- cable capital gains rate. Bear in mind that dividends are not guaranteed. A company may reduce or eliminate its dividend at any time. Qualified dividends are paid by U.S. corporations and some foreign corpora- tions. A qualified foreign corporation is one that is incorporated in a U.S. possession, eligible for tax-treaty benefits with the U.S. or traded on an established U.S. securities market. Income from pre- ferred instruments qualifies to the extent that it represents an equity instrument rather than a debt instrument. Mutual fund dividends do not qualify unless the dividends passed through are from quali- fied corporations, as described above. It's important to note that real estate invest- ment trust dividends do not qualify for the reduced rate. Keep in mind, the return and principal value of an investment in stocks fluctuate with changes in market conditions. Upon redemption, stocks may be worth more or less than the original investment. Bonds Municipal bonds, which state and local governments issue, pay interest that's exempt from federal income taxes — although some may be subject to the federal alternative minimum tax (AMT). The interest is also often exempt from state taxation if you purchase bonds issued by either the state in which you reside or a local government within that state. Although the interest income is tax-free, capital gains, if any, are subject to taxes. Before purchasing a municipal bond, you must consider whether the tax-free interest is a big enough advantage to overcome the potential for higher yield that a taxable government or corporate bond may pro- vide. To compare a tax-free versus a taxable bond, consider the taxable-equivalent yield. Generally, a municipal bond with a 4 percent yield, for example, would compare to a corporate bond with a 5.3 percent equivalent yield (assuming you are in the 25 percent income tax bracket and excluding state tax). A decision between these two bonds might still favor the tax- free bond because the taxable bond would add to adjusted gross income (AGI), and the calculations related to AGI and AMT. In addition, tax-free municipal bond interest is not included in investment income for the 3.8 percent Medicare surtax. Interest from taxable bonds is included for the tax computation. Investing in fixed-income securities involves certain risks, such as market risk — if securities are sold prior to matu- rity — and credit risk, especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed-income investments may be worth less than original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment. Paul Guerra is the Managing Principal of Brookshire Wealth Management in Canton, Ohio. For more information, visit brookshirewealth.com or email Guerra at paul.guerra@wfafinet.com. Investment products and services are of fered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC. Brookshire Wealth Management is a separate entity from WFAFN. Wells Fargo Advisors does not provide legal or tax advice. Be sure to consult with your tax and legal advisors before taking any action that could have tax consequences. Please consult your legal advisors regarding your fiduciary duties. Wells Fargo Advisors Financial Network, LLC, Member SIPC, is a registered broker- dealer and a separate non-bank affiliate of Wells Fargo & Company. ■ +++++++++++++++++++++++++++ + +++ + +++ +++++++++++++++++++++++++++ FINANCIAL PLANNING ❯ to Help Control Your Tax Bill Submitted by Paul D. Guerra Manage Your Portfolio 3 0 | Cleveland/Akron/Canton MD NEWS ■ M D N E W S . CO M ■ J U LY/AU G U S T 2 0 1 5