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7 Tax Smart Strategies - Tax Mini-Series

Welcome to another mini-series. I'm going to go a bit off-topic from equity compensation with this one. I think we deserve a break after the 4 part series on net unrealized appreciation. I'm going to spend the next two episodes talking about tax-smart investing. 

I have a couple of mantras that you may have heard me say before but these are specific to taxes. First... it's not what you make, it's what you keep. Meaning I want to know what your returns are after taxes. More importantly, it extends to making sure you’re taking advantage of all of the IRS approved tax-saving strategies that are available to you. Why? Well, the other mantra is don’t tip Uncle Sam. There is no reason to pay more in taxes than necessary. Just to be clear, I would never recommend anything illegal or even unethical. The IRS provides a lot of strategies for saving taxes, but it's up to you to take advantage of them. Let go find out how!

You will want to hear this episode if you are interested in...

  • Using a 3rd party money manager [1:44]
  • Tax smart strategy #1 - Tax Loss Harvesting [3:08]
  • Tax smart strategy #2 - Proper design of portfolios [3:50]
  • Tax smart strategy #3 - Tax lot investments [4:15]
  • Tax smart strategy #4 - Withdrawal and rebalancing [5:00]
  • Tax smart strategy #5 - Managing holding periods [5:27] 
  • Tax smart strategy #6 - Portfolio transition management [6:00]
  • Tax smart strategy #7 - Gifting [6:34]
  • This week’s FLASHBACK [7:44] 

When is losing money a good thing?

Tax smart strategy #1 is Tax Loss Harvesting. Not all investment losses are a bad thing. At least it’s not when you can harvest those losses. You can use losses to offset any gains which then reduces your overall tax liability. Sell holdings that are now worth less than you paid for them. These losses, which are harvested can then be used to offset gains for holdings you sell at a price higher than you paid. The overall goal is to reduce your total tax bill. Losses can help offset gains and reduce your taxes. 

How holding investments save you money on taxes

Good old tax-smart strategy #5 brings us to how long you hold investments. We're talking about capital gains here, which means you're selling an investment for more than you initially paid for it. Long-term capital gains rates typically mean a lower tax rate, you just need to hold the investment for one day over a full year. Additionally, by managing holding periods and looking at capital gains, you can spread gains out over time and reduce your tax bill. 

This week’s FLASHBACK: First Jobs

I started working when I was about 12. It started with a paper route and some lawn mowing. I enjoyed the paper route but hated mowing lawns. I also had a very brief couple of days working at a friend's family car dealership, another job I didn't enjoy. However, my first real job was at a place called The Spaghetti Bender. The Bender was a quasi-fast food Italian place. You sat down, there was a wait staff, but the food in the back was quick and easy to cook. The location was small and I think it maybe had 20 tables. My starting position was dishwasher but I was quickly promoted to cook. Not a whole lot of complexity in the limited menu they had, we did basic pastas, pizzas, Calzones, and a few other items such as fish. Most of my friends worked at fast food places or washed dishes so it was cool to say I was a cook.

If you worked a Friday or Saturday night shift by the time you were done it was too late to go out with friends so after we closed the restaurant we would hang out and cook breadsticks. Sometimes we would see what kind of crazy dishes we could make with any leftover ingredients that would have been otherwise thrown out. After working there all that time, my car had the worst smell. The Bender was a 20-minute drive from my house, I guess all the time driving home and stinking of fast Italian eventually embedded that smell in the cloth seats of my ‘83 Chevy Cavalier. It was a great high school job but it took months for that smell to go away after I left!

I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.