Managing cash and cash equivalents effectively requires considering their tax implications. Here are some tax-efficient strategies from the sources:

• Compare After-Tax Yields: When choosing between taxable and tax-exempt money market accounts or mutual funds, compare their after-tax yields to determine which option provides a higher return after taxes.
• Consider Tax-Exempt Investments: For investors in higher tax brackets, tax-exempt investments like municipal bonds, tax-free money market accounts, and mutual funds holding municipal bonds can offer attractive after-tax returns. Investing in tax-exempt bonds issued by your state of residence may also help you avoid state income tax on earnings.
• Strategic Timing of CD and Treasury Bill Maturities: Interest income from CDs maturing in one year or less and Treasury bills is recognized when the investments mature. Consider purchasing these instruments to mature in the following tax year to defer income recognition, if it aligns with your overall tax strategy. However, if you anticipate being in a higher tax bracket the following year, this strategy might not be advantageous.
• Simplified Accounting for Floating NAV Money Market Funds: The IRS provides a simplified method to account for gains and losses from frequent purchases and redemptions of floating Net Asset Value (NAV) money market funds. This simplifies tax compliance by allowing you to calculate net gain or loss annually without tracking each transaction.
• Leverage Tax Advantages of Treasury Bills: Treasury bills offer tax advantages, including exemption from state and local income taxes. When held to maturity, they generate no capital gains or losses. If sold before maturity, gains are treated as ordinary income to the extent of recovered acquisition discount, and any excess is taxed as a short-term capital gain.
• Understand Treasury STRIPS Taxation: Treasury STRIPS are zero-coupon bonds created by stripping interest coupons from Treasury notes and bonds. They are sold at a discount and don’t make periodic interest payments. Investors recognize income annually under the Original Issue Discount (OID) rules, even though they don’t receive actual payments until maturity.
• Evaluate the Election to Accrue Acquisition Discount: While generally, income from Treasury bills is recognized at maturity, an election allows taxpayers to recognize acquisition discount (the difference between the purchase price and the face value) over the bond’s life. This could be beneficial for accelerating income to utilize expiring loss carryforwards or if you expect higher tax rates in the future.
• Analyze Impact on Other Tax Items: Consider the indirect impact of taxable or tax-exempt income on your overall tax liability. Taxable interest can increase your AGI, potentially reducing certain credits, deductions, and exemptions subject to AGI phaseouts. Tax-exempt interest can impact the taxability of Social Security benefits for those nearing the base amounts for calculating taxable benefits.

It’s essential to consult with a qualified tax professional to determine the most suitable strategies for your specific financial situation. They can help you navigate the complexities of tax laws and develop a comprehensive plan to manage your cash and investments effectively.