Choosing Investments to Avoid Taxes

by David Jenyns on July 28, 2008

A simple and perfectly legal way to avoid any Federal income tax on investments is to choose bonds. Superficially, the idea of owning tax-exempt bonds naturally sounds fine, and the higher a man’s income-tax bracket, the more important it sounds. Some mutual-fund sponsors have been attempting to obtain tax exemption for an individual on dividends received from a mutual fund whose portfolio is invested entirely in tax-exempt bonds.


Some investments, although not labeled tax-exempt, may cause far less taxable income liability than others do. The government pays this income only when a bond is cashed, and a bond-owner can elect to wait for this cashing before he pays taxable income. So the tax to be paid on an E bond is something of a gamble, depending on when the bond is cashed. The tax delay on E bonds is especially attractive to a middle-aged man who is paying taxable income at a rather high rate.

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