Perhaps the most vital concept to grasp in this key area is that "after-tax" returns are what count. It does you little good to realize substantial gains in your portfolio if your profits are gobbled up by taxes. Think of this sequence: after-tax return, after-tax income, after-tax estate. That’s the tax planning drill you want to go through with each prospective investment. What’s the likely after-tax return? How will that affect my after-tax income? What will be my resulting after-tax estate?

We tend to regard our after-tax income as our paychecks – what’s left after our employers take out all those deductions noted on the stubs. Yet this can be a misleading indication of useable income because so many other categories come into play. Tax deductions, tax exemptions, investment proceeds, mortgage interest, out-of-pocket medical expenses can all affect after-tax income, and may have nothing to do with your salary.

Estate taxes are still another matter for consideration. While federal estate taxes are being phased out, Congress is due to resurrect them in the year 2011. And the federal phase-out has done nothing to moderate any state or local inheritance taxes. Moreover, certain types of taxes can follow you to the grave. Consider the example of a 401K plan, which has been growing on a tax-deferred basis. If you pass on before taking distributions and paying taxes on them, your heirs will be subject to taxes on the full balance of the account.

Each investment you make has potential tax consequences. Some investments produce dividends. Some generate interest. Still others appreciate and result in capital gains. Changes within your portfolio can have tax ramifications as well.

It’s clear that before you can implement a tax plan to preserve as much of your wealth as possible for you and your heirs, you must first understand your tax situation, then get a grasp on the tax consequences of each investment you’re considering. This process involves understanding the tax code. If you are not familiar with the tax code, don’t be disheartened. Professional advice on taxes is quite accessible. Even those people who consider themselves world-class investors may have financial advisors –the discipline is simply too complicated and changeable to grasp without counsel. The year 2001, to cite just one example, brought more than 400 changes to U.S. tax law. Shortly following, The Jobs and Growth Tax Relief Reconciliation Act of 2003 mandated $350 billion in tax cuts. The cuts were designed to provide short-term tax relief in order to encourage people to spend money and get the economy moving again. The key phrase here is "short-term." Many of the provisions of this act "sunset," or phase out, in the coming years up until 2011, when the rates will return to their previous levels.

The temporary nature of the cuts reflect Congress’ fear that it might have given away too much of the store if these reductions are made permanent – and nobody wants to be responsible for possibly bankrupting the country! Upon President Bush’s re-election, he has stated that making these tax cuts permanent is on his agenda. In the meantime, it makes sense to take advantage of them while they are available, just in case the President isn’t successful.

Most investors are directly affected by the tax cuts given in the 2003 Tax Act. Specifically, they benefit from the tax reduction on dividends and capital gains. Both economists and investors have long decried the double tax that stockholders have to pay on dividends. They feel it’s unfair that investors should pay dividend taxes after corporations have already paid taxes on earnings from which those dividends come. But eliminating the tax entirely might be worse for the budget deficit. So to compromise, the levies against dividend income remains, but has dropped from taxpayers’ ordinary income tax bracket to 15 percent if in the top four tax brackets. Those in the 10 or 15 percent ordinary tax bracket pay five percent. Long-term capital gains taxes, what investors pay when they sell assets they’ve owned for more than a year, also were reduced from 20 percent to 15 percent for taxpayers in the highest four brackets. Investors in the lower two tax brackets have seen their rates halved to five percent. Short-term capital gains taxes remain at regular tax rates, which correspond to your ordinary income tax bracket.

Now, here’s the catch: both of these tax rate reductions disappear in 2009 and return to the regular tax rates. It is already 2005. Investors only have three more years available to take advantage of these lucrative tax rates. Highly appreciated stock, which has a low cost basis, can be divested during this time at a reduced tax rate. This can translate into thousands of dollars of tax savings. Pre-retirees should consider this technique if they are faced with needing to convert "growth" investments into "income" generating assets.

Another issue that investors tend to question is whether or not they should invest in tax-free vs. taxable investments. The only way to determine the answer is to know your tax rate. Generally, tax-free investments correspond with the fixed-income sector. Money market funds and bond investment vehicles come in taxable and tax-free versions. The way to determine which is more efficient is through the application of a simple mathematical formula: Tax-free return divided by (1 – tax rate). For example, if you are considering purchasing a municipal bond paying a tax-free return of 3.25 percent and you are in a 40 percent overall tax bracket (including federal, state, and local taxes), the rate of return you would need for a taxable investment to be more efficient is 5.83 percent (3.50 divided by .60). Be sure to re-evaluate the suitability of tax-free vs. taxable investments as your personal tax situation changes.

Make sure to take advantage of retirement plans. Investing in 401K plans is one of the most tax-efficient ways of accumulating assets. Because you are able to save money before taxes, the amount of money you are able to save is greater than if it filtered through the payroll system. If you are in an overall 40 percent tax bracket, there would only be 60 cents left to invest versus $1 that would be invested into a pre-tax qualified retirement plan. Due to the 2003 Tax Act, the maximum limit on retirement plan contributions has also gone up. This year you can contribute a maximum of $14,000 to a 401K plan. This is $1,000 more than last year. In 2006, another increase of $1,000 will occur. If your objective is to contribute the maximum amount, be sure to notify your payroll department so that they make the necessary adjustment.

Important as they are, taxes never should be the primary factor in your investment decisions. You’re still looking for the best long-term value in your asset selection; taxes are one factor to be considered in a much broader evaluation. Understand taxes, weigh them, but don’t let the tax tail wag the investment dog. Ultimately, if your investments are successful, you’ll make enough money to cover your taxes – and then some.