Bond vs. Fixed-income Stocks vs. Stocks & tax implications

Bond and Fixed-income Stocks

(Please read the Disclaimer first. If you disagree, please stop reading my blog).

GENERAL OBLIGATION BOND – GO BOND

• General obligation bonds are issued with the belief that a municipality will be able to repay its debt obligation through taxation or revenue from projects. No assets are used as collateral.
• Moderate fixed dividend at 4.5-5.5% per year depending upon the bond you bought
• GO bond dividend is tax-exempt for both Fed and State
• Buy GO bond directly through the broker, not public market, higher commission
• Buy GO bond ETF which is the same as the stock trading at much lower commission
• stock symbols for Muni bond: BFZ, PZC, (fed and state tax exempt), MHD and MCA (may not be 100% state tax free) 5.5-6% dividend per year, buy and sell easily

Fixed-income stocks

• 6.5-8% dividend per year
• Regular stock purchase commission, buy and sell easily
• pay the dividend tax
• stock symbols: HPS, HTD

Stock Investment

• Buying individual stocks is risky and time-consuming to trace and do the research
• Risk management is hard to control
• Buying some ETFs and mutual fund is either lower return or not diversified
• A good stock investment model is proved successful by the history data:
• 50% TLT + 50% QQQ (some people may add GLD)
• More than 10% annual return in the past 10 years

Tax on capital gains, dividends, and interests.

	Capital gains	Others
Stocks	·          ·         Short-term capital gains are taxed at the investor's ordinary income tax rate. ·         Long-term capital gain: Tax rate is 0% for the 10%–15% brackets; 15% for the 25%–35% brackets; and 20% for the 39.6% bracket.	Qualified dividend: Tax rate is 0% for the 10%–15% brackets; 15% for the 25%–35% brackets; and 20% for the 39.6% bracket.
Bonds	Bonds’ capital gains are treated same as stocks’ capital gains.	The income from taxable bond funds is generally taxed at the federal and state level at ordinary income tax rates in the year it was earned.

Protect large stock investment (options, RSU, ESPP, ipo) and lower your tax

Protect large stock investment

(Please read the Disclaimer first. If you disagree, please stop reading my blog).
to be worked on

California Municipal Bonds

Investing in Municipal Bonds

(Please read the Disclaimer first. If you disagree, please stop reading my blog).

In a nutshell: 

The US tax law is complex and confusing. In Bay Area, most of us have high income so our highest tax federal tax bracket is easily > 35%, plus CA state income tax 10% + sales tax, we would easily pay 50% for additional income. This additional income includes stock investments, dividends, interests, ESPP, RSU, options, etc. outside your normal w-2 wages.

Solutions: 

• You max out pre-tax deduction in 401K or 403B plan. I think it's $17,500/yr for one person. A couple can deduct $35k before federal + state tax get you. You may also deduct $5k/yr child credit.
• As Chinese, we always save extra money for investment vhecles like stock, bond, or real estate but we will be taxed for capital gains, interests (债券利息), dividends(股票红利) at our highest tax bracket.
• CA municipal bonds are one excellent tax-free (fed & state) solution. However, you may face many choices for state bonds, city bonds, or utility bonds. Then the easiest way is to buy them in the form of mutual fund ( https://investments.pimco.com/Products/pages/632.aspx) or ETFs like  AKP, BFZ, PZC (6.65%). Remember, they are for your regular accounts. Based on my exp, I work hard to earn > 10% return a year, then I have to pay so much tax. It's so frustrating.

Motives:

• Stock market is always volatile.
• Even if we beat the S&P 500 performance, we have to pay tax. This easily sinks our annual return.
• When the stock goes against us, we try to cut loss quickly (< 30 days) but this triggers wash-sale easily. Therefore I cannot deduct the loss from my other capital gains. Keep holding it would trigger more loss.
• Long bonds are volatile too. The longer the bond is, the more volatile its. TLT (20-yr) > SHY (2-yr) but with higher returns. 
• Low quality bonds are volatile too. The riskier the bond is, the more volatile its. Think of corporate junk bonds, Greek bonds, etc. You may earn a high annual ROI but lose the principal instead (保利不保本).
• Bonds are negatively correlate to inflation, and hence the S&P movement. We can use TIP to stay ahead of inflation.
• Most of bond interests are taxable but CA muni bonds are exempted. 

How to purchase

• Call your broker for specific state, city, local bonds,
• Buy mutual funds intended for CA muni bonds.
• Buy ETFs intended for CA muni bonds in your brokerage accounts.