Tax Optimization for High Net Worth Investors

Portfolio Tax Optimization for High Net Worth Investors (Updated for 2026)

Posted On February 4, 2025 By Scott Stratton, CFP(R), CFA In Portfolio Management /  

Tax planning is not an afterthought — it’s a core part of preserving and maximizing wealth, especially as you approach or enter retirement. For high-net-worth investors with $500,000–$5 million in investable assets, proactive tax optimization can meaningfully improve after-tax returns and preserve more wealth for income, legacy, and peace of mind.

Below are practical strategies tailored for investors like you — married couples, pre-retirees, and retirees who want to keep more of what they earn without chasing gimmicks.

Portfolio construction decisions are just one piece of the puzzle. Long-term results improve when investment strategy is coordinated with comprehensive tax planning for retirees, especially during the transition from accumulation to distribution.

2026 Long-Term Capital Gains Tax Rates & Thresholds

In 2026, long-term capital gains (on assets held more than one year) remain subject to 0%, 15%, or 20% federal rates, depending on taxable income. These thresholds are slightly adjusted for inflation:

Tax RateTaxable Income (Single)Taxable Income (Married Filing Jointly)
0%Up to ~$49,450Up to ~$98,900
15%~$49,451–$545,500~$98,901–$613,700
20%Over ~$545,500Over ~$613,700

These figures apply to federal capital gains tax — state taxes may also apply.

This structure means gains are marginally taxed (like ordinary income), and timing can dramatically affect your liability.

1. Asset Location — Put the Right Holdings in the Right Accounts

Asset location is the practice of placing investments in accounts based on how they’re taxed:

  • Tax-inefficient assets (e.g., high-turnover mutual funds, REITs) belong in tax-deferred or tax-free accounts
  • Tax-efficient assets (e.g., broad index ETFs) are often best in taxable accounts
  • High-growth assets often go in Roth IRAs so future gains are tax-free

This strategy reduces the drag of taxes over time and is especially important for high-net-worth portfolios.

2. Tax-Loss Harvesting — Use Losses to Offset Gains

Tax-loss harvesting involves selling securities at a loss to offset realized capital gains. The IRS allows:

  • Capital losses to offset capital gains dollar-for-dollar
  • Up to $3,000 of excess losses against ordinary income annually
  • Unlimited carryforward of unused losses to future years

The wash-sale rule prevents repurchasing identical securities within 30 days before or after the sale, but you can strategically swap into similar positions to maintain exposure. This works great with ETFs.

This is one of the most direct ways to reduce your current and future tax bills.

3. Long-Term Holding — Lower Your Effective Tax Rate

Holding assets longer than one year shifts gains into the long-term category, which often carries significantly lower rates than short-term gains — which are taxed as ordinary income.

This is a simple yet powerful discipline for reducing overall tax exposure, particularly for investors in or near retirement.

4. Charitable Giving & Donor-Advised Funds

Donating appreciated securities is highly tax-efficient:

  • You avoid capital gains on the donated shares
  • You generally receive a deduction equal to the fair market value
  • Donor-Advised Funds (DAFs) allow you to “front-load” charitable giving in high-income years

If you’re age 70½ or older, Qualified Charitable Distributions (QCDs) let you give up to a set limit directly from an IRA to charity — reducing adjusted gross income (AGI) without itemizing. These can also lower Medicare IRMAA exposure if coordinated with income planning.

5. Coordinating Roth Conversions

Strategic Roth conversions shift assets from tax-deferred accounts to tax-free accounts. Done in lower-income years (for example, before Social Security and Required Minimum Distributions begin), this can:

  • Lock in tax treatment at current (often favorable) brackets
  • Reduce future RMDs, which can push income into higher capital gains and IRMAA brackets
  • Provide tax-free income later in retirement

Because conversions increase Modified Adjusted Gross Income (MAGI), they can affect Medicare costs and surtaxes like the 3.8% Net Investment Income Tax (NIIT). Planning timing and staging is key — and part of a broader tax-efficient retirement strategy.

Learn more about staging conversions at: Roth Conversions After 60 — When They Make Sense and When They Don’t.

6. Managing the Net Investment Income Tax (NIIT)

High-net-worth investors often face the 3.8% NIIT on net investment income when MAGI exceeds certain thresholds (e.g., $250,000 for married couples filing jointly). This surtax can effectively raise your top capital gains rate to approximately 23.8%.

Strategies to manage NIIT include:

  • Holding tax-efficient assets in tax-advantaged accounts
  • Timing distributions and conversions
  • Reducing MAGI through deductions and income sequencing

7. Estate and Legacy Planning

Estate strategies can significantly reduce tax burdens for beneficiaries:

  • Step-up in basis at death eliminates unrealized capital gains for heirs
  • Gifting strategies, including annual gift exclusions, reduce future estate tax exposure
  • Irrevocable trusts and life insurance trusts can preserve wealth tax-efficiently

Well-structured estate planning prevents unnecessary capital gains and income taxes for the next generation.

8. Integrating Tax Planning with Income Sequencing

Tax planning does not happen in a vacuum. How you time distributions, RMDs, Social Security, IRA conversions, and capital gains interacts with:

A comprehensive plan considers these connections. For example, combining tax‐efficient withdrawal strategies with Guardrails for Retirement Income and How to Reduce IRMAA improves both cash flow and after-tax outcomes. Tax-efficient portfolio design becomes especially important once withdrawals begin, which is why it should be coordinated with overall retirement income planning.

How a Fiduciary Advisor Can Help

Optimizing a high-net-worth portfolio for taxes requires a plan, not a checklist. An advisor helps you:

  • Model multi-year tax scenarios
  • Coordinate asset location across accounts
  • Time Roth conversions to minimize lifetime taxes
  • Integrate tax planning with retirement income, Medicare, and estate strategies

We work nationwide with pre-retirees and retirees who want clarity and confidence in their financial paths — whether or not they hire us for ongoing wealth management.

Learn more:

This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Frequently Asked Questions

What are the 2026 capital gains tax brackets?
In 2026, long-term gains are taxed at 0%, 15%, or 20% federally, depending on your taxable income level.

How does the 3.8% NIIT affect my taxes?
If your MAGI exceeds certain thresholds (e.g., $250,000 joint), the NIIT can apply to your net investment income, increasing your overall tax on capital gains and investment income.

What is tax-loss harvesting?
It is selling investments at a loss to offset realized gains, reducing taxable income now and carry forward losses to future years.

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Investment Themes for 2025

Investment Themes for 2025

Posted On January 1, 2025 By Scott Stratton, CFP(R), CFA In Portfolio Management /  

It’s January 1st and we are looking at our Investment Themes for 2025. We adjust our portfolio models annually, looking to take advantage of the latest information. Using an evidence-based evaluation of the available investment universe, we weight our portfolios towards the categories with attractive long-term return expectations. We don’t time the market – we are buy and hold investors and stay fully invested in a target allocation. Market downturns are an inevitable part of being an investor and we think it is detrimental to try to predict short-term movements. We know that predictions are highly fallible and that there is a real benefit to staying diversified.

This is our process to tactical asset allocation: we always start with the overall “recipe”. The key choice is deciding the right weight of each category. Then within each category, we use low-cost Exchange Traded Funds. That’s because we know that the majority of active managers do worse than their benchmark. We would rather invest in an Index or Factor based strategy.

You can see our past Investment Themes for 2024, 2023, 2022, and 2021 on our website. Now, here are our thoughts for 2025 on stocks and bonds. In an effort to keep this relatively concise, I am giving you a summary below, and not my full analysis and thoughts on each category. And you also don’t see the analysis that goes into the ETF and fund selection process, but that step is secondary to getting the overall allocation right.

US Stocks Expensive But Have Momentum

We’ve just had two years in a row with greater than 20% returns in the S&P 500 Index. US Stocks have gotten more expensive, however, this has largely been a story of a handful of tech stocks driving the returns of the whole market. The market has had poor breadth – the majority of stocks have barely moved at all in the last two years. Much like 1999, we may eventually see a period of poor performance in the overall index, where today’s winners lose their steam. And it is also possible that the 493 stocks which are not the “Magnificent 7” could do better in the years ahead.

The Vanguard Capital Markets Model and research from Goldman Sachs both suggest that the S&P 500 is likely to have returns in the low single digits over the next decade. This is why we have been overweight in Small Cap and International stocks. However, we were too early in 2024 and US Large cap stocks have continued higher in spite of being more expensive than other stocks.

We will be adding to US Large Cap for 2025, reducing our underweight in the category. We will make this purchases by trimming bonds and bringing bonds down to neutral. The momentum in US Stocks is strong right now and we have decided we want to more closely track the market for the time being. For clients who would prefer a larger allocation to bonds, we can switch models, for example from 70/30 to 60/40. I do think we will want more international equities eventually. But until we see signs of a reversal, US Stocks are leading the world.

Equity Notes:

  • Better long-term expectations from international versus US; from value versus growth; from Small Cap versus Large Cap. We will maintain our broad diversification.
  • Going into 2025, US Large Cap has been strong and we want to add to that momentum for now.
  • We prefer equal weight index versus market cap weighted index. We are adding to US Equal Weight Index from bonds.

Bonds and Fixed Income

The Fed has started to cut interest rates and the yield curve has flattened. We have seen the short end of the yield curve coming down and we seem to be out of the inverted yield curve. For several decades, an inverted yield curve always preceded a recession within 12 months on average. Will we escape this recession signal in 2025? At least as of right now, December 2024, there are no signs of a US recession on the horizon.

But the interest rates dropping has given us a wave of bond calls. Our Agency Bonds which were yielding 5.5% to over 6% are all getting called early. We have seen yields as low as 4.8% getting called this month. That means having to replace those bonds with lower yields, presently 4% to 5.25%. That is a bit disappointing, especially if these bonds could potentially be called in another 6-12 months. Agencies, Corporations, and other issuers will continue to refinance at lower rates. Unfortunately, there are not a lot of non-callable bonds, with competitive yields. We will continue to Ladder bonds from 1-5 years, and we principally use Treasuries under 2 years and Agency Bonds from 2-5 years.

MYGA fixed annuities remain a great tool for guaranteed monthly income for retirees. Any investor seeking to lock in today’s interest rates, without the possibility of a call, will like a MYGA. I personally bought another MYGA in 2024 for my Roth IRA and these remain very attractive going into 2025.

Notes for Bonds in 2025

  • We reduced our overweight in bonds to neutral, given ongoing bond calls and falling rates.
  • Our focus is on high quality US short-term individual bonds, laddered from 1-5 years.
  • The spread on investment grade corporate and municipal bonds is too low. They have more risk than Treasuries and Agency bonds.
  • High-yield bonds are yielding over 6%. If you believe the estimates of the S&P 500 returning only 4-5% over the next decade, high yield corporate bonds are a lot less volatile than owning Equities, with a comparable or better return.
  • We continue to own Emerging Market bonds. They had a great 2024 and have attractive yields entering 2025. Other international bonds are too low yielding and also very volatile.
  • We had considered selling our TIPS (Treasury Inflation Protected Securities) in September when prices were high. However, with the possibility of inflation returning due to proposed tariffs, we are maintaining our allocation to TIPS.
  • After a strong rally in 2024, Preferred Stocks seem to have topped out for now. We are reducing allocations from 5% to 3% in most portfolios.

What Not To Do

With the incoming administration in Washington, we will undoubtedly see a number of programs which could impact the economy positively or negatively. We are following these developments closely. The positive impacts for investors could include deregulation, lower income taxes, and lower corporate taxes (stocks are valued on their profits, which are after-tax). On the other hand, we worry about tariffs causing inflation, retaliatory tariffs from other countries hurting US exports, and inflation due to deporting millions of workers. And then there is the massive government debt, which now costs over $1 trillion in interest alone each year. (Last week’s rant – Congress hastening Social Security’s insolvency to 2033, just 8 years away.)

We can’t make light of any of these situations. We are prepared to adjust our portfolios as needed. However, I think that making significant changes to our investment allocations is both unwarranted right now and probably harmful in the long-run. Regardless of who was in the Oval Office, the US stock market has had a great track record of going up and to the right. Profits today are strong and hopes are high for AI-driven growth and productivity. And so there is a risk of putting too much focus short-term political concerns and missing the growth of the US and Global economic engine.

One of the challenges of making our Investment Themes for 2025 was resisting the temptation to make a lot of changes. We can see what is working right now. If you have a good plan and allocation, I don’t think that you need to throw it all away in 2025. No one knows what the market is going to do. Many other investors have the same thoughts or concerns and so these are often already reflected in the price of stocks.

10 years from now, portfolios are likely to be significantly higher than today. We will likely have forgotten all about 2025 entirely, just as we don’t think much about 2015 today. Our Investment Themes for 2025 are important, but our behavior and process are more important than any one particular year in the market. We don’t know what the new year will bring, and that’s okay. We do know what has worked consistently: holding a diversified allocation, using index funds, and keeping costs and taxes low. That is our focus and unwavering commitment to you.

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9 Ways to Manage Capital Gains in Retirement (Updated for 2026)

Posted On April 7, 2018 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

Capital gains taxes can significantly reduce your after-tax retirement income if left unmanaged, especially for investors with $500,000–$5 million in investable assets. This article explains nine effective strategies to manage capital gains — with a focus on long-term planning, tax efficiency, and coordination with broader retirement income goals.

1. Know the 2026 Capital Gains Tax Brackets

Capital gains are taxed differently based on how long you hold an investment:

  • Short-term gains (assets held ≤ 1 year): taxed as ordinary income
  • Long-term gains (assets held > 1 year): taxed at preferential rates

For 2026, long-term capital gains rates are:

RateSingleMarried Filing Jointly
0%Up to ~$49,450Up to ~$98,900
15%~$49,451–$545,500~$98,901–$613,700
20%Over ~$545,500Over ~$613,700

These thresholds are adjusted annually for inflation. Keep in mind state capital gains taxes may apply as well.

2. Match Asset Types to Account Types (Asset Location)

Asset location places investments in accounts based on how they’re taxed:

  • Tax-inefficient assets (high turnover, dividends) → tax-deferred or tax-free accounts
  • Tax-efficient assets (broad index funds, ETFs) → taxable accounts
  • High-growth assets → Roth IRAs (tax-free growth)

This strategy reduces taxable events and works well when combined with tax-loss harvesting and Roth conversion planning.

Capital gains decisions affect more than just your tax bill this year. They often interact with Medicare premiums, Social Security taxation, and withdrawal strategy, which is why they should be considered within a broader tax planning for retirees framework.

3. Harvest Tax Losses When Appropriate

Tax-loss harvesting means selling investments at a loss to offset realized gains, reducing your tax bill.

Key points:

  • Capital losses offset capital gains dollar-for-dollar
  • Excess losses can offset up to $3,000 of ordinary income annually
  • Unused losses carry forward indefinitely

Avoid the wash sale rule by waiting 31 days before rebuying the same security.

For more on how distributions can affect taxable events even without sales, see: Do You Receive Mutual Fund Capital Gains Distributions?

4. Time Sales in Low-Income Years

Realizing gains in years where your income is lower — such as early retirement years before Social Security and RMDs — can reduce how much you pay in capital gains tax. Lower taxable income may also open up the 0% capital gains bracket, which applies at lower income levels.

This kind of income sequencing works hand-in-glove with:

5. Use Qualified Charitable Distributions (QCDs)

If you are over age 70½ and have an IRA, Qualified Charitable Distributions let you transfer up to $105,000 annually directly to charity without including the amount in taxable income — effectively offsetting gains without increasing MAGI.

QCDs count toward RMDs and can help manage:

  • Taxable income spikes
  • Medicare IRMAA brackets
  • Social Security taxation

This strategy is most impactful when planned with your overall tax and income sequencing.

6. Coordinate Roth Conversions and Capital Gains

Roth conversions increase Modified Adjusted Gross Income (MAGI) in the conversion year, which can unintentionally raise your capital gains tax rate, trigger Medicare IRMAA, or push other income items into higher brackets.

To minimize unintended tax consequences:

  • Stage Roth conversions during low-income years
  • Avoid year-end lump conversions that push MAGI too high
  • Coordinate with RMD planning and Social Security timing

Learn more about timing and tradeoffs in Roth Conversions After 60 — When They Make Sense and When They Don’t.

7. Mitigate the Net Investment Income Tax (NIIT)

Investors with MAGI above $250,000 (individual) or $320,000 (married filing jointly) generally pay a 3.8% Net Investment Income Tax (NIIT) on net investment income, including capital gains.

Ways to manage NIIT exposure include:

  • Holding tax-efficient assets in tax-advantaged accounts
  • Reducing MAGI through deductions or income sequencing
  • Strategically timing capital gains realizations

NIIT is one of the less understood drivers of tax drag for high-net-worth retirees; planning ahead can avoid unnecessary surtaxes.

8. Consider Partial Sales and Installment Sales

Instead of selling a large position all at once, consider:

  • Partial sales over multiple years to spread tax impact
  • Installment sales for privately held business interests to defer gain recognition

These techniques help manage annual taxable income and can make gains fit within lower tax brackets, especially when tied to retirement income flows.

9. Leverage Estate and Legacy Planning

Holding assets until death often results in a step-up in basis for beneficiaries, eliminating capital gains tax on appreciation during your lifetime. Work with estate planning professionals to consider:

  • Gifting strategies
  • Trust structures
  • Timing of transfers

Legacy planning intertwined with tax planning can preserve more wealth for heirs while reducing lifetime taxes.

For related guidance, see 7 Missed IRA Opportunities and Tax Strategies Under the OBBBA.

How a Fiduciary Advisor Helps With Capital Gains

Managing capital gains is not simply about minimizing a tax bill in isolation. A fiduciary advisor integrates tax planning into retirement income, distribution sequencing, healthcare costs, and legacy goals.

A coordinated plan can help you:

  • Time asset sales for tax efficiency
  • Model outcomes across multiple years
  • Balance tax, cash flow, and longevity risk
  • Align capital gains decisions with IRA/Roth strategy

You don’t have to navigate these decisions alone. Many retirees find fiduciary guidance valuable — whether for complex planning or even just an annual review. This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Learn more in:

Frequently Asked Questions

What is the difference between long-term and short-term capital gains?
Long-term gains (assets held > 1 year) are taxed at preferential rates (0%, 15%, 20%), while short-term gains are taxed as ordinary income.

How does capital gains recognition affect Medicare premiums?
Capital gains increase MAGI, which can trigger higher Medicare IRMAA premiums. Strategic timing can help manage both taxes and healthcare costs.

What is tax-loss harvesting?
Tax-loss harvesting sells investments at a loss to offset capital gains and up to $3,000 of ordinary income annually, with excess losses carried forward.

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Beware: 2017 Fund Capital Gains Distributions

Posted On October 8, 2017 By Scott Stratton, CFP(R), CFA In Portfolio Management, Tax Strategies /  

We are starting to receive estimates for year-end 2017 Capital Gains distributions from Mutual Funds, and no surprise, many funds are having large distributions to their shareholders this year. As a refresher, when a mutual fund sells a stock within its portfolio, the gain on that sale is passed through to the fund owners at the end of the year as a taxable event.

When you invest in a 401(k), IRA, or other qualified account, these capital gains distributions don’t create any additional taxes for you. If you reinvest your distributions, your dollar value of the fund remains the same, and you are unaffected by the capital gain. However, if you are investing in a taxable account, these distributions will cost you money in the form of increased taxes.

A quick look at estimates from American Funds, Columbia, and Franklin-Templeton shows that many equity funds are having capital gains distributions of 3-10% this year. A few are even higher, such as the Columbia Acorn (17-21%) and Acorn USA (23-28%). Imagine if you made a $100,000 investment at the beginning of the year, your fund is up 16% and then you get a distribution for $28,000 in capital gains! Yes, capital gains distributions can exceed what a fund made in a year, when the fund sells positions which it owned for longer.

Capital Gains Distributions create a number of problems:

  • Even if you are a long-term shareholder, when the fund distributes short-term gains, you are taxed at the higher short-term tax rate.
  • If you didn’t sell any of your shares, you will need to find other money to pay the tax bill, which can run into the thousands each year if you have even just a $50,000 taxable portfolio.
  • If you are thinking of buying mutual fund shares in Q4 of this year, you could end up buying into a big December tax bill and paying for gains the fund had 6-12 months ago.
  • In addition to paying capital gains on fund distributions, you will still have to pay tax when you sell your shares.
  • Capital gains distributions are in addition to any dividends and interest a fund pays. In general, we want dividends and interest income as additions to our total return. Capital gains distributions, however, do not increase our return and are an unwelcome tax liability.

If you have a taxable account, or both taxable and retirement accounts, we may be able to save you a substantial amount of money on taxes. We can use tax-efficient investments like Exchange Traded Funds (ETFs), which typically have little or ZERO capital gains distributions at the end of the year. This puts us in control of when you want to sell and harvest your gains. When you have multiple types of accounts, we can place the investments into the best account to minimize your tax bill.

If you do presently have mutual funds in a taxable account, it may be a good idea to take a look at your potential exposure before the end of the year so you are not surprised. If you sell before the distribution is paid, you can avoid that distribution. Now that will mean paying capital gains based on the profit you have when you sell. But you definitely want to be planning ahead. When you’re ready to create a tax-managed portfolio that looks at all your accounts together, we can help you do that.

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Do You Receive Mutual Fund Capital Gains Distributions?

Posted On August 8, 2016 By Scott Stratton, CFP(R), CFA In Portfolio Management /  

I always ask prospective clients to bring a copy of their most recent tax return and often learn a wealth of information reviewing their taxes. In doing such a review last week, I noticed that in the previous year, a prospective client had to pay taxes on $13,875 in taxable capital gains distributions from their mutual funds.

If your mutual fund is inside of a 401(k) or IRA, capital gains distributions don’t matter. However, when a mutual fund is held in a taxable account, you end up paying taxes on capital gains distributions even though you didn’t sell the position. Instead, you are paying taxes for trading the fund manager does inside the portfolio, or worse, to provide liquidity to other shareholders, who sold before December and left you holding the bag to pay for their capital gains.

Luckily, there is a better way. In my previous position working with high net worth families, the majority of assets were held in taxable portfolios. We had a number of families with $10 million to over $100 million in investments with our firm. Needless to day, I spent considerable time in looking at ways to reduce taxes, and became very effective at the process of Portfolio Tax Optimization. I offer this same approach and benefits to my clients today.

Vanguard studied the value advisors bring through planning skills like tax optimixation. They estimate that “Advisor’s Alpha” can add as much as 3% a year to your net returns.
Link: Quantifying Vanguard Advisor’s Alpha

If you have significant assets in taxable accounts, I can help you. Here are five ways we can lower your taxes and allow you to keep more of your hard earned principal:

1) Use ETFs. The prospective client with $13,875 in capital gains distributions, had approximately $600,000 in mutual funds. I created a spreadsheet that calculated capital gains if they had been invested $600,000 in my 60/40 portfolio instead. Most of my holdings are Exchange Traded Funds (ETFs), which due to their unique structure, are much more tax efficient than mutual funds. In fact, my nine ETF holdings had total distributions of zero in the same year .

In the 60/40 model, we also had five mutual funds in categories where there are not equivalent ETFs. My calculation of capital gains distributions: $2,167. So, if we had been investing for this client, their capital gains distributions could have been reduced from approximately $14,000 to $2,000. The investment vehicles we choose matter!

I should note that this is just looking at capital gains distributions. Both ETFs and mutual funds also pay interest and dividends, which are taxable. There is more to managing taxes than just picking ETFs.

2) Asset Location. We could have further reduced taxes by choosing where to place each holding. Some funds generate interest, which is taxed as ordinary income, where as other funds generate qualified dividends, which is taxed at a lower rate of 15-20%. We place the funds with the greatest tax liability into your IRA or other qualified account, to reduce your overall tax burden. Funds that have little or no distributions are ideal for taxable accounts.

3) Avoid short-term capital gains. If you sell an investment within a year, those short-term gains are taxed as ordinary income, your highest tax rate. After 12 months, sales are treated as long-term capital gains, at a lower rate of 15-20%. We do not sell or rebalance funds before one year to avoid short-term gains. Unfortunately, many mutual fund managers don’t have any such tax mandate, so oftentimes, a significant portion of fund’s capital gains distributions are short-term.

4) Tax Loss Harvesting. At the end of each year, we review taxable portfolios for positions which have declined. We harvest those losses and immediately replace each position with a different fund in the same category (large cap, international, etc.). This fund swap allows us to use those losses to offset other gains or income, while maintaining our target asset allocation. If realized losses exceed gains, you can use $3,000 of losses to reduce ordinary income. Remaining losses are carried forward to future years.

5) Municipal Bonds. For investors in a higher tax bracket, your after-tax return may be better on tax-free municipal bonds than on taxable bond funds. However, an advisor will not know this without looking at your tax return and determining your tax bracket. That’s why we make planning our first priority, before making any investment recommendations. (Would you really trust anyone making investment recommendations without knowing your full situation? Are those recommendations designed to profit them or you?)

We take a disciplined approach to managing portfolios to minimize taxes, and it is a valuable benefit to be able to customize our approach for each individual client.

On this same client’s tax return, I realized that they did not deduct their Investment Management fees, a $6,000 miscellaneous deduction.
Link: Are Investment Advisory Fees Tax Deductible?

If you have taxable investments, we may be able to save you thousands, too. Let’s schedule a call today. You deserve a more sophisticated and efficient approach to managing your wealth.

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Why You Should Harvest Losses Annually

Posted On November 23, 2015 By Admin In Portfolio Management /  

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This time each year, I review every client’s taxable accounts in search of losses to harvest for tax purposes. While no one likes to have a loss, the reality is that investments fluctuate and have down periods, even if the long-term trend is up. I’ll be contacting each client in the next two weeks and will let you know if I suggest any trades.

Even though we may make some sales, we still want to maintain our overall target asset allocation. Under US tax rules, we cannot buy a “substantially identical security” within 30 days in order to claim a tax loss. This precludes us from taking a loss and immediately buying back the same ETF or mutual fund. It does not however, prevent us from selling one large cap ETF and buying a different ETF that tracks another large cap index or strategy. This means that we can harvest the loss without being out of the market for 30 days and missing any potential gains during that time.

When we harvest losses, we can use those losses to offset any gains we have received and reduce our taxes in the current year. The criticism against tax loss harvesting is that it just serves to postpone taxes rather than actually saving taxes.

For example, let’s say that we purchased 10,000 shares of an ETF for $10 per share and today those shares are only worth $9.00. Our cost basis is $100,000 and if we sold today for $90,000 we could harvest a loss of $10,000. We replace that position with a different ETF and invest our $90,000. Fast forward a couple of years and the position is now worth $120,000. If we sell for $120,000, we would have a $30,000 gain, whereas if we had not done the earlier trades, our gain would be only $20,000. Apply a long-term capital gains rate of 15% and the savings of $1,500 in taxes this year is offset by $1,500 in additional taxes down the road.

So, why bother? There is an additional benefit to tax loss harvesting besides deferring taxes for later: you may be able to use those losses to offset short-term capital gains or ordinary income, which can be at a much higher tax rate than the 15% long-term capital gains rate.

The rules for capital gains are that you first net short-term gains and short-term losses against each other. Separately, you will net long-term gains and long-term losses. If you have net losses in either category, those losses may be subtracted from gains in the other category. So if you had $10,000 in net long-term losses, you could apply those losses against $10,000 of short-term capital gains. For someone in the 35% tax bracket, that $10,000 long-term loss could be worth $3,500, if you can apply that loss towards short-term gains, instead of the $1,500 we would normally associate with a long-term loss.

If you have more capital losses than gains in a year, you can apply $3,000 of those losses against ordinary income, and carry forward the remaining losses into future years indefinitely, until they are used up. If we can use our $3,000 loss against ordinary income, a taxpayer in the 35% bracket will save $1,050 in taxes, which is a lot better than the $450 we would save in long-term capital gains if we did not harvest the $3,000 loss.

After deferring gains for many years, taxpayers may be able to avoid realizing gains altogether two ways. First, if you have charitable goals, you can give appreciated securities to a charity instead of cash. If you give $1,000 worth of funds to a charity, the charity receives the full $1,000; you get a full tax deduction AND you avoid paying capital gains on those shares.

The second way to avoid capital gains is if you allow your heirs to inherit your shares. They will receive a step-up in cost basis and no one will owe capital gains tax. That’s a rather extreme way to avoid paying 15% in capital gains taxes, and most people are going to need their investments for retirement. However, the fact is that delaying taxes can be beneficial and that the tax is not always inevitable.

The reason I share this is that the argument that tax loss harvesting only serves to delay taxes ignores quite a few benefits that you can realize. You may be able to use those capital losses not just to offset capital gains at 15%, but potentially to offset short-term gains at a much higher rate, or to offset $3,000 a year of ordinary income.

Since we primarily use ETFs, we already have a great deal more tax efficiency than mutual funds, and we should have little capital gains distributions for 2015. If you’re not with GLWM and have mutual funds in a taxable account, be aware that many mutual funds have announced capital gains distributions for the end of this year.

There are quite a few ways we aim to add value for our clients and we take special interest in portfolio tax optimization. If there’s a way to help you save money in taxes, that’s going to help you meet your financial goals faster.

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6 Steps to Save on Investment Taxes

Posted On June 17, 2014 By Admin In Portfolio Management /   1 Comment

For new investors, taxes are often an afterthought.  Chances are good that your initial investments were in an IRA or 401(k) account that is tax deferred.  If you had a “taxable” account, the gains and dividends were likely small and had a negligible impact on your income taxes.  Over time, as your portfolio grows and you have more assets outside of your retirement accounts, taxes become a bigger and bigger problem.  Eventually, you may find yourself paying $10,000 a year or more in taxes on your interest, dividends, and capital gains.

A high level of portfolio income may be a good problem to have, but taxes can become a real drag on the performance of your portfolio and eat up cash flow that you could use for better purposes.  Luckily, there are a number of ways to reduce the taxes generated from your investment portfolio and we make this a special focus of our process at Good Life Wealth Management.  We will discuss six of the ways that we work with each of our clients to create a portfolio that is tax optimized for their personal situation.

1) Maximize contributions to tax-favored accounts.  While the 401(k) is the obvious starting place, investors may miss other opportunities for investing in a tax advantaged account.  Since these have annual contribution limits, every year you don’t participate is a lost opportunity you cannot get back later.  In addition to your 401(k) account, you may be eligible to contribute to a:

  • Roth or Traditional IRA;
  • SEP-IRA if you have self-employment or 1099 income;
  • “Back-door” Roth IRA;
  • Health Savings Account (HSA).

Also, don’t forget that investors over age 50 are eligible for a catch-up contribution to their retirement accounts.  For 2014, the catch-up provision increases your maximum 401(k) contribution from $17,500 to $23,000.

2) Use tax-efficient vehicles.  Actively managed mutual funds create capital gains distributions as managers buy and sell securities.  These capital gains are taxable to fund shareholders, even if you just bought the fund one day before the distribution occurs.  These distributions are irrelevant in a retirement account, but can be sizable when the fund is held in a taxable account.

To reduce these capital gains distributions, we use Exchange Traded Funds (ETFs) as a core component of our equity holdings.  ETFs typically use passive strategies which are low-turnover and they may be able to avoid capital gains distributions altogether.  It used to be difficult to estimate the after-tax returns of mutual funds, but thankfully, Morningstar now has a tool to evaluate both pre-tax and after-tax returns.  Go to Morningstar.com to get a quote on your mutual fund, then click on the “Tax” tab to compare any ETF or fund to your fund.  I find that even when a fund and ETF have similar pre-tax returns, the ETF often has a clear advantage when we compare after-tax returns.

One last factor to consider: many mutual funds had loss carry-forwards from 2008 and 2009.  So you may not have seen a lot of capital gains distributions in the 2010-2012 time period.  By 2013, however, most funds had used up their losses and resumed distributing gains, some of which were substantial.

3) Avoid Short-Term Capital Gains.  Short-term gains, from positions held less than one year, are taxed as ordinary income, whereas long-term gains receive a lower tax rate of 15% (or 20% if you are in the top bracket).  We try to avoid creating short-term capital gains whenever possible, and for this reason, we rebalance only once per year.  We do our rebalancing on a client-by-client basis to avoid realizing short-term gains.

4) Harvest Losses Annually.  From time to time, a category will have a down year.  We will selectively harvest those losses and replace the position with a different ETF or mutual fund in the same category.  The losses may be used to offset any gains harvested that year.  Additionally, with any unused losses, you may offset $3,000 of ordinary income, and the rest will carry forward to future years.

A benefit of using the loss against other income is the tax arbitrage of the difference between capital gains and ordinary income.  For example, if you pay 33% ordinary tax and 15% capital gains, using a $3,000 long-term capital loss to offset $3,000 of ordinary income is a $540 benefit ($3,000 X (.33-.15)).

5) Consider Municipal Bonds.  We calculate the tax-equivalent rates of return on tax-free municipal bonds versus taxable bonds (i.e. corporate bonds, treasuries, etc.) for your income tax bracket.  With the new 3.8% Medicare tax on families making over $250,000, tax-free munis are now even more attractive for investors with mid to high incomes.

6) Asset Location.  This is a key step.  Not to be confused with Asset Allocation, Asset Location refers to placing investments that generate interest or ordinary income into tax-deferred accounts and placing investments that do not have taxable distributions into taxable accounts.  For example, we would place high yield bonds or REITs into an IRA, and place equity ETFs and municipal bonds into taxable accounts.  This means that each account does not have identical holdings, so performance will vary from account to account.  However, we are concerned about the performance of the entire portfolio and reducing the taxes due on your annual return.

If these six steps seem like a lot of work to reduce taxes, that may be, but for us it is second-nature to look for opportunities to help clients keep more of their hard-earned dollars.  The actual benefits of our portfolio tax optimization process will vary based on your individual situation and can be difficult to predict.  However, a 2010 study by Parametric Portfolio Associates calculates that a tax-managed portfolio process can improve net performance by an average of 1.25% per year.

Tax management is a valuable part of our process.  And even if, today, your portfolio doesn’t generate significant taxes, I’d encourage you to think ahead.  Prepare for having a large portfolio, and take the steps now to create a tax-efficient investment process.

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