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Sometimes, you just can’t win for losing. The stock market has a good year. You make a lot of money. And, wham! You get hit with a big tax bill on April 15. So, you start to wonder — why bother?

April 15 has come and gone. (Thank goodness!) You can’t do anything about last year, but you need to start thinking about tax strategies for 1998 to avoid the same shock. Remember, the goal is not to avoid taxes but to finish the day with the most money in your pocket. That means comparing investments on a tax-adjusted basis to determine your “take.”

Many investors use mutual funds to invest in stocks, and these are great vehicles, particularly for small investors. The problem is that the portfolio manager could care less about your tax bill. He’s only trying to beat the averages. A taxable event does not occur until stocks are sold or dividends are declared. Mutual funds must declare capital gains and dividends at least once a year.

Each fund is a portfolio of many stocks. If you have a growth and income fund or one that invests in large companies, there will be dividends. These companies tend to be well-established and tend to pay out a portion of their earnings in dividends. The fact that they are well- established usually means less risk. But you must pay tax on any dividends that are declared. And the tax rate on these will be your income tax rate.

The higher your tax bracket, the more painful the bite.

The manager buys and sells during the year, depending on market events and the manager’s approach. Every time a stock is sold, there is either a capital loss or a capital gain. The sum total of these events will be the capital gain declared by the fund. The measure of how much of this is going on in a fund is called the turnover ratio. The higher the ratio, the more selling going on. If a fund has a turnover ratio of 100%, that means the manager starts the year with one set of stocks and ends with a totally different set. This guy likes to trade. If the turnover ratio is 20%, you can bet this guy has a buy and hold strategy.

Also, with the new capital gains law, there are four different holding periods for stocks. One is short-term, which is less than one year. One is mid-term, which is 12 to 18 months. And one is long-term, which is longer than 18 months. The last is super long-term which is longer than 5 years and will be effective for stocks sold after the year 2005. Short-term gains are taxed at your income tax rate. Mid-term gains are at your rate or 28%, whichever is lower. Long-term gains are taxed at 10% or at 20%, depending on your tax rate. And super long-term gains will be at 8% or 18 %, again depending on your tax rate.

Fund managers who are trading a great deal tend to have more short-term and mid-term gains. This costs you money and eats into your overall return. Buy and hold managers tend to have more long-term gains, meaning less taxes for you.

Two funds which have identical rates of return may vary on a tax-adjusted basis. The fund with the higher turnover ratio is actually leaving less money in your pocket after you pay Uncle Sam.

If you’re worried about taxes but still want to use mutual funds for investing in stocks, pick a fund with a low turnover ratio. Tweedy Browne Global Value has a turnover ratio of 20%. Acorn’s turnover ratio is 33%. Fidelity Magellan has a turnover ratio of 67%.

On the other end, GT Global American Value has a turnover ratio of 256%, and Dean Witter Mid-Cap Growth has a ratio of 328%. Indexed funds, typically, have low turnover ratio. Vanguard Index 500 has a turnover ratio of 5%. These funds are simply mimicking a stock market index and can be a good choice if you’re trying to avoid taxes.

And, remember, when you’re reinvesting dividends and capital gains in your fund, this adds to your original cost (cost basis) and will mean less of a hit when you sell the fund.

But there is something psychologically disturbing about paying tax on gains and dividends that you never get your hands on. You’re paying tax on a future benefit, and we humans like instant gratification. Just prepare yourself for this event.

If you’re in a real bind with taxes and have a big portfolio, the best way to go may be to invest in individual stocks. This allows you to buy and sell when it’s the best tax timing for you. The higher your tax bracket, the more beneficial a buy and hold strategy is for you. Also, you can split a sale between two calendar years to cut your tax bill.

Using individual stocks simply gives you more flexibility. The new tax law gives such a break on long-term gains that it’s crazy not to take advantage of it.

Whatever you do, don’t let your tax bill scare you into municipal bonds. While these are good for people in high tax brackets who need to generate income, they often don’t pay enough to justify what you give up in rate of return. Use your tax bracket to consider whether municipals are a good choice for you. Get out your calculator so you can compare these bonds with other investments on a tax-adjusted basis.

For those investments within IRAs or retirement accounts, disregard all of the above. You don’t have to worry about taxable events within these accounts. They are not reportable. You can trade as much as you want and generate as much income as you want within a retirement account. Make the most use of these tax-deferred accounts and look into using the new Roth IRA which makes all earnings tax-free. If you’re in a really high tax bracket and have done all you can do, you may want to look at an annuity to shelter some earnings.

Okay, that’s just about all you can do to avoid that big tax bill. Now, quit your griping. Be happy you’re making money. Or like my mother used to say, “Stop complaining. There are starving children in India.”

Nancy Lottridge Anderson, CFA, is president of New Perspectives Inc. in Clinton. Her e-mail address is NL2invest@aol.com

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