I’m risking a few heated email responses by wading into the furor over Mitt Romney’s taxes.  But I can’t help myself, because it’s a lot more relevant to your and my financial situation than you may realize.  Romney maximizes income that attracts low tax — long-term capital gains and qualified dividends — and he minimizes income that attracts high tax — short-term capital gains and non-qualified dividends.  It’s almost that simple.  The tax code may not seem fair for a guy with Romney’s net worth, but for the rest of us, his strategy is worth following.

As a reminder, the federal tax rate on long-term gains and qualified dividends is 15%.  Tax on short-term gains (investments you’ve held for a year or less) or non-qualified dividends (primarily dividends from foreign stocks) is at your ordinary income rate, which can be up to 35%.  That difference can turn a good return into a disappointing one, or vice versa.

Finding tax-efficient investments is not hard.  “Passive” mutual funds (mutual funds which track an index and therefore do minimal trading) are the best place to look.  Most of their capital gains will be long-term.  If they are US stock funds, their dividend income will primarily be qualified.  Municipal bonds can be okay, but look out — their high trading costs are an easy way for brokers to make money from your account.

Not all investments are tax-efficient, but that doesn’t always mean you should avoid them.  Prime examples include REITs (real estate investment trust), taxable bonds and commodities.  If possible, hold them in your IRA or 401k, where you can defer the tax for years.  Don’t forget 529 plans, which allow you to avoid any tax on gains if the money pays college expenses.

When I advise clients on their investments, tax is a key component.  It should be for you too.