As a general rule, the more money you make, whether in work generated income or capital gains, the more you will pay in taxes. But rules are meant to be broken, and there are ways to mitigate tax losses with the right planning and advice.
The after-tax return vs. the pretax return. Everyone wants their investments to perform well. But for many investors it’s their after-tax return that may make all the difference. After all, even if your portfolio is earning double-digit returns, it may not matter if you’re also losing a percent of those earnings to taxes.1
Holding onto assets. One method that may increase tax efficiency is to simply minimize buying and selling in order to manage your capital gains taxes. The idea is to pursue long-term gains, instead of seeking short-term gains through a series of steady transactions. In the words of Warren Buffett, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”2
Remember, before making any financial decision speaking with a financial or tax professional is a great idea. A financial professional can help you formulate a strategy that incorporates your long-term goals and risk tolerance.
Tax-loss harvesting. Many savvy investors engage in selling certain securities at a loss to counterbalance capital gains. This means the capital losses they incur are applied against their capital gains, which lowers personal tax liability. But remember, you can take up to $3,000 in capital loss each year and can carry losses forward into subsequent ones.3
Assigning investments selectively to tax-deferred and taxable accounts. Another common tactic some investors use over the long run is placing tax-efficient investments into taxable accounts, while also placing less-tax-efficient investments in tax-advantaged accounts. This also depends heavily on how you have your investments allocated. Consulting a financial professional may help you decide if this is a smart move for your particular situation.4
The Takeaway. These are merely a few methods that some investors and high-income individuals might look at to manage their tax losses. These brief overview options should not be taken as investment, tax, or financial advice. If you are in a position to focus more attention on your tax efficiency plan, you should consult directly with a licensed professional for a more robust analysis of your situation.
You can reach out to me directly at any time to go over your accounts and create a working strategy.
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This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 – businessdictionary.com/definition/tax-efficiency.html [6/6/2019]
2 – brainyquote.com/quotes/warren_buffett_173492 [6/6/2019]
3 – fmgwebsites.com/mike.woods/resource-center/investment/a-taxing-story-capital-gains-and-losses [6/6/2019]
4 – confidentvision.com/resource-center/retirement/the-power-of-tax-deferred-growth [6/6/2019]