In investing, it’s not what you make, but how much you keep (taxes being the difference). In this edition of our e-newsletter, we offer some tax related insights as we head into tax season. Please note that these comments are not intended as specific tax advice, but for informational purposes only.
Tax-Efficient Investing
The U.S. tax code contains more than a million words which is longer than the King James Bible as well as Tolstoy’s classic War and Peace. Navigating the federal tax code can be complex and we wanted to share some of the primary tax rules as they apply to investment accounts (see table below).
Idea #1: Favor long term capital gains and qualified dividend income over ordinary income. Tax exempt bonds and bond funds can also be used (especially for high income tax bracket individuals/families). Be sure to maintain diversification in the portfolio and avoid excessive concentration of positions that can result from focusing solely on tax minimization. Investing is as much art as science.
Idea #2: Focus on asset location to optimize which investments should be placed in taxable, tax-deferred or tax-free accounts. For example, low turnover equity investments and tax-free municipal bonds should be placed in taxable accounts and less tax-efficient investments such as REITs and taxable bonds which can distribute significant dividend and interest income should be placed in tax-deferred accounts.
Idea #3: Utilize Tax Loss Harvesting. While investment gains are always preferable to losses, even losses (from a taxable account) can be used to offset gains for tax purposes. This strategy is especially effective during times of higher volatility like what we have seen in energy and emerging markets over the last year. A key obstacle to be mindful of when implementing this strategy is to avoid a “wash sale” which is selling and buying an identical security within 31 days.
Idea #4: Smart charitable giving. Charitable donations of appreciated securities can be transferred to a charitable gift trust or donor advised fund rather than sold in a taxable account. There is a double tax benefit to the donor: 1) he/she avoids capital gains taxes (charity receives entire benefit of the current market value of the security), 2) income tax deduction on the donation for the donor.
Idea #5: Thoughtful estate planning. When an investor passes away, any unrealized capital gains in a taxable account will be “stepped up” in basis to the market value, thereby eliminating capital gains for the disposition of the assets (although estate tax rules still apply).
1099 Tax Forms Now Available
For clients of Elevation Wealth Partners and others that have their investment assets at Charles Schwab & Co., the 1099 tax forms are now available online and being mailed to all account holders. For any clients that would like us to provide these forms directly with your CPA/tax preparer we are happy to do so.
Taxes and the Upcoming Elections
We at Elevation Wealth Partners try our best to be non-partisan and wealth maximizing when it comes to financial advice. While we cannot predict if any tax reforms will ultimately come out of the rhetoric we are hearing from the candidates; we would like to encourage our clients and friends to be educated on what the candidates are proposing with respect to tax reforms (including individual and corporate income tax, capital gains, estate tax). The Tax Foundation is a non-profit, non-partisan tax research organization based in Washington, D.C. and their research can be found here.
For specific tax advice, consult your tax advisor or Zainer Rinehart Clarke CPAs. As always, we are here to be a resource to you and those important to you.
Sincerely,
Barry N. Mendelson, CFP | Richard P, Clarke, CPA, PFS | Ryan K. Kosakura, CFA | John L. Davis, CFP
