Tax Moves for Your Portfolio, Even if Tax Rates Change
By Michael McKeown, CFA, CPA - Chief Investment Officer
There are several proposals for increases in tax rates. These include a bump higher in ordinary income rates from 37% to 39.6%. A second part is higher long-term capital gains for those making more than $1 million in income. Changes in estate tax rates, exemptions, and a step-up in basis rules are also on the table.
It is still unclear if there will even be an increase. Most strategists do not believe rates will increase to the top end of the proposals.
Even if the proposals come to pass, there are several approaches investors can take to make portfolios more tax efficient.
1. Direct Indexing
This strategy is useful if you have a portfolio of stocks from active managers that follow a particular index. Another implementation is having a concentrated stock position in a sector that you want to avoid in the rest of your portfolio.
- Generate taxable losses. Use those taxable losses to offset gains elsewhere in the portfolio.
- Track the index of your choosing closely, such as the S&P 500 Index, or even international or small cap indices.
- This will lower the fees from active strategies that are not consistently generating excess returns.
2. Asset Location
Implement this approach when you have assets in different types of accounts, from taxable trusts and individual accounts, Roth IRAs, and traditional IRAs.
- Locate higher-yielding assets in traditional IRAs.
- Locate high-growth assets in Roth IRAs.
- Hold tax-efficient assets like equity ETFs (exchange traded funds) in taxable accounts.
3. Qualified Opportunity Zone Fund
Consider these when you have a big gain from selling a stock, fund, or business. This allows you to jumpstart a private real estate investment program. The benefits include:
- Ability to delay paying capital gains tax until 2026.
- Decreased capital gains liability by 10%.
- No tax owed on Opportunity Zone Fund investment if held for 10 years or more.
These are just a few of the strategies we use when aligning a client’s financial plan with a tax-efficient investment portfolio.
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