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Tax Management Techniques


I’ve been writing and doing videos the last month or so on specific techniques you can use to improve your after-tax investment picture.  Why? It isn’t what you make, it’s what you keep!  With the tax deadline quickly approaching (seems odd writing that in late June), I wanted to share a quick list of some of the best building blocks of an overarching tax management strategy for your investments. Thanks to SEI for these solid tips, all of which can be used to help improve your after-tax returns.

 

  • Tax Lot Accounting is an accounting method for a securities portfolio where the manager tracks the purchase, sale price, and cost basis of each security. Done properly, it gives the manager the ability to “swap” one tax lot with another lot that is more tax advantageous.

 

  • Tax Loss Harvesting is something I’ve talked about often. Here is where an effective manager can sell a stock at a loss and realize that loss, which may offset a future gain. Tax-loss harvesting MUST happen year-round and not just at the end of the year. During volatile and bear markets (such as we’ve seen recently), there is often more opportunity for this strategy. Be aware of wash-sale rules!

 

  • Wider Rebalancing Ranges help to reduce trades in a portfolio. This just means when an investment portfolio is established it has certain asset percentages for its overall allocation. If the percentages change then a manager will rebalance (sell and buy) to get back to the original allocation. By widening the range a portfolio can drift from its original allocation there is less trading. Remember, trading creates capital gains and taxes.

 

  • Tax Aware Trading is taking the time to be aware of the tax lots as trades are made. This is done to realize capital losses and position for realizing gains that are long-term instead of short-term when possible.

 

  • Managing the Holding Period comes down to determining how the capital gain or loss should be taxed as a long or short-term holding. Long-term investments (owned for more than one year) tend to be taxed at a lower rate than short-term ones.

 

  • Charitable Donations of stock require you to identify the most tax-advantaged stocks to gift. Basically, figure out which positions have gains and which have losses.

 

  • Income Needs should cause a manager to identify those positions that are once again the most tax advantaged. In this case, it often means the ones with the highest cost basis. Doing this properly will help mitigate a higher tax bill for those investors seeking regular income from their stock portfolios.

 

Hopefully these themes make sense as tax-managed investments can get rather complex.  Now, you may be wondering if I do this directly for clients. The honest answer is although I could, I don’t. If I did, I would have to spend all day doing this which means never talking to clients, and I kind of like talking to clients.

Now, you can execute this type of strategy if you wish to sacrifice the time and resources. Things like buying a trading station, locking yourself away from 9:30AM to 4:00PM EST each day the market is open, and getting your CPA designation are the basics I would recommend. Hopefully your boss is open-minded😉   

 

Personally, I use a dedicated team for my tax-managed portfolios. In all my years of doing this I’ve only come across one professional manager that does this effectively and at a competitive price. Their portfolios cost about .50% and add roughly 1% of after-tax returns on top of the normal returns of the portfolios they manage. Additionally, they have a sizeable staff that only focuses on tax managed investments.   This is definitely a job for the pros who have done it full-time for years as they wrote the book on It’s Not What You Make. It’s What You Keep!