all it capital confiscation.

That's what I call the taxes the government assesses on our investment income. After all, we paid taxes on this money as part of our regular income before we made the investments. It's double-taxation. My answer, as always, is to find ways to make sure the government gets as little of this twice-taxed money as possible.

The first key to investment tax planning is the recognition of the special status of long-term capital gains. Capital assets include stock, investments, real estate held for investment and most properties held for personal purposes.

Long-term capital gains are the profits from the sale of capital assets that you held for more than one year. Net long-term capital gains (profits made after subtracting any capital gains) receive special treatment. The maximum tax rate that you pay on such gains is limited to 28 percent, regardless of your tax bracket.

For people in higher tax brackets, the maximum tax rate offers some advantages, obviously, but the door swings both ways. If you are planning to make a charitable contribution, your tax deduction is similarly limited to the 28 percent rate if what you contribute is a long-term capital gain property. You could cost yourself some tax savings if you're not careful.

So use the capital gains and losses rules to your advantage. Both long-term and short-term capital losses are allowed to offset any capital gains on a dollar-for-dollar basis. The maximum you can deduct in any given year is $3,000, however. Any losses that exceed the $3,000 limit can then be "carried forward" into future years until you have fully written off the losses.

For example, if I have a net capital loss of $30,000, and no capital gains, it would take me 10 years to fully deduct that loss ($3,000 x 10 = $30,000). In this situation, I should use those losses to my advantage and take as many capital gains as possible, up to the $30,000 limit. Those profits would essentially be tax-free (except of course that you paid taxes on those monies to begin with.)

Having a maximum marginal tax rate of 28 percent on net long-term capital gains is good; having a rate of zero is even better. Any interest earned on municipal bonds - bonds issued by the state or any subdivision of the state - is not taxable for federal income tax purposes. (Some special purpose municipals may be subject to the alternative minimum tax but that discussion is beyond the scope of this article.) Because these are tax-free bonds, they usually pay a lower rate of interest than taxable bonds.

In comparing returns, you should always compare the after-tax returns. Whichever investment offers the higher return should be your first choice, in most cases. Don't forget to consider the impact of state taxation in computing final yield. For example, most states don't tax interest on municipal bonds issued within their own borders but may tax the interest on bonds issued by other states. Check the rules for your state.

To help finance qualified higher education expenses, Congress created a new incentive to purchase U.S. savings bonds. Under current law, interest that accrues on savings bonds does not have to be reported until the bonds are redeemed, unless you decide to report the increase in redemption value each year. For years after 1989, you can potentially exclude all or a portion of the interest that accrues on the bonds.

If your adjusted gross income in the year of redemption exceeds $74,200 on a joint return or $49,450 on all other returns, there is a phase-out of the benefit. This phase-out eliminates all of the benefits for families with adjusted gross incomes of $104,200 or more for joint returns, or $64,450 on others.

A qualified U.S. savings bond is any bond issued after 1989 at a discount to an individual who has attained age 24. Note that you, as the older generation, must buy the bond. If you put the bond in the name of the child, you lose the exemption. Remember the government bases the tax rate on the income you're making at the time you redeem the bond, not your income now. If you expect to be making substantially more when you redeem the bond, that higher income might disqualify you.

One final word about investment tax planning for those receiving Social Security payments or those who expect to receive those payments in the future. Part of those payments may be taxable, depending on your income. In determining how much of your Social Security will be taxed, the Internal Revenue Service considers not only your taxable income, but your tax-free income as well. By increasing your tax-free income, you may be subjecting more of your Social Security income to taxation.

One way to potentially avoid or reduce this problem is to switch from tax-free income to tax-deferred income. With a tax-deferred annuity, you're not taxed on the income earned. That happens once you take the distribution from the annuity. The deferred income earned by the tax-deferred annuity doesn't count toward the determination of the amount of Social Security that will be taxed. Therefore, if you don't currently need the cash flow from the investment, a tax-deferred annuity should be considered as a way to potentially reduce your taxes on your Social Security receipts.

The key in all capital gains investments is to give yourself the profits, not Uncle Sam.