Tax Strategies: Portfolio Management

HomeTax Strategy

Executive summary

Stressed about losing large portions of your hard earned income to Uncle Sam? Here at Steward, we’ve gathered up the best of the best tax tips and tricks for tax-efficient portfolio management to ensure that you’re setting yourself up for success and savings. 

Check out our main blog post with all of our tax-saving strategies here

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Tax Efficient Portfolio Management

  1. Avoid short-term capital gains: Hold onto investments for at least one year to avoid higher tax rates on "short-term" investments.

    External Guide: https://www.kiplinger.com/taxes/capital-gains-tax/604943/what-is-capital-gains-tax
    Video Guide: https://www.youtube.com/watch?v=4_AshGqy20Y
  1. Take advantage of long-term capital gains: Uncle Sam encourages the long-term investment of capital, by offering you lower tax rates on your long-term investment income than on money you earn through your own work. Your money can earn more than you can, at lower tax rates.

    External Guide: https://www.kiplinger.com/taxes/capital-gains-tax/604943/what-is-capital-gains-tax
  1. Investing A Roth IRA In Early Stage Growth Companies / Crypto: Use retirement accounts (legal tax shelters like Roth IRAs) to protect investments in rapid growth businesses (or assets like crypto) from substantial taxation on their potential growth when they are eventually sold.

    External Guide: https://www.kitces.com/blog/roth-ira-buy-early-stage-pre-ipo-company-thiel-business-shares-prohibited-transaction-disqualified-person/?fbclid=IwAR2D2XAEu1SEQFIXOGkuWJ6wo36xfak5yo6JJ-WE9U7ZYNCDrw8AapJi0Ew
  1. Asset location: Tailor which investments go in which accounts based on their tax-treatment, to save on taxes while still achieving your overall asset allocation goals. Strategically place assets that generate income or capital gains (e.g., bonds that spit off coupons, stocks that spit off dividends), in tax-sheltered accounts (e.g., Roth IRAs, 401(k)s) as opposed to typical personal brokerage accounts.

    External Guide: https://www.kitces.com/blog/yield-split-asset-location-tax-drag-alpha-efficiency-index-funds/
  1. Tax loss harvesting: Make lemonade out of lemons. Get a capital gains tax benefit from certain investments that are down temporarily by writing off some of the losses on taxes, while staying invested in "substantially identical", high quality, long-term investments. Up to $3,000 a year ($1,500 married filing separately) in net investment losses can be deducted from your regular income each year, saving $1,000-$1,500 in taxes, and unused losses can be carried over year to year.

    External Guide: https://www.whitecoatinvestor.com/tax-loss-harvesting/
    Video Guide: https://www.youtube.com/watch?v=8jEWYL9wwhQ&feature=emb_title
  1. Direct indexing: Turbo-charge your tax loss harvesting strategy by "unwrapping" ETFs and investing in the indexed securities individually. Direct indexing portfolios can take full advantage, harvesting losses in underperforming stocks even as the market as a whole is up.

    External Guide: https://www.kiplinger.com/investing/604846/move-over-etfs-direct-indexing-is-an-investment-strategy-worth-paying-attention-to
    Video Guide: https://www.youtube.com/watch?v=71tsfOcSQ2Y
  1. Crypto "wash sale" loophole: Turbo-charge your tax loss harvesting strategy. Crypto currently escapes the "wash sale" rule that applies solely to securities, so owners can take full advantage of tax harvesting rules without having to wait 30 days before re-investing.

    External Guide: https://www.kiplinger.com/taxes/capital-gains-tax/603753/cryptocurrency-and-the-wash-sale-rule
    Video Guide: https://www.thestreet.com/personal-finance/does-wash-sale-rule-apply-cryptocurrency#gid=ci02a5740b6000247d&pid=jeffrey-levine-chief-planning-officer-buckingham-strategic-wealth
  1. "Buy, Borrow, Die" / Using Loans: Fund your lifestyle by borrowing rather than selling investments that have gone up a lot, using a security-backed loan (e.g., home equity line of credit against your real estate, margin loan against your investments) to delay or reduce capital gains tax. Under a loophole in the current law, the assets get a "step-up" in cost basis when they pass on to your heirs (plain-English: it's assumed your heirs bought them at whatever the current market price will be at the time of your death, which means a massive reduction in capital gains tax for them).

    External Guide: https://www.wsj.com/articles/buy-borrow-die-how-rich-americans-live-off-their-paper-wealth-11625909583
  1. Municipal Bonds: Use municipal bonds for your bond allocation, since these are generally exempt from federal and state taxes for residents of the issuing state. The tax benefits of this strategy can be unwound by relatively higher prices compared to other bonds (i.e., the tax "benefit" gets neutralized by a higher price) and the higher risk profile of these bonds (e.g., higher risk of a state defaulting on its bonds vs. federal government).

    External Guide: https://www.fool.com/investing/how-to-invest/bonds/municipal-bonds/
  1. HSA contributions: An HSA is an account that comes with access to a high-deductible health plan (HDHP), and tax-optimizers use them as triple tax-free long-term savings vehicles to pay for future medical expenses. They can be rolled over year to year and they are (1) tax-deductible reducing your income tax today (2) grow tax-free, preventing you from having to pay any taxes on gains as they grow (3) get distributed tax-free, for any healthcare expenses, preventing you from having to pay any capital gains taxes.

    External Guide: https://www.fool.com/retirement/plans/hsa/investing/

Other Tax Strategy Guides:

Income Tax
Homeowner / Real Estate

Gifting / Charitable Donations

Self-Employed / Business Owner

Estate Tax

Ready to implement these strategies, but don’t know how to execute the plan? 

Check out our blog post on finding the best tax providers here.

We are often asked for recommendations for tax preparation (actually doing the forms) to complement the work we do with families on tax strategizing (planning in advance to lower future tax bills.) We were frustrated that no "Yelp" existed for accountants/CPAs/tax preparers, despite the fact that wealth advisors so often traded recommendations amongst themselves!  So we put together this list based on recommendations from various advisors. Check it out here.

Steward ‘s mission is opening up the 1%’s wealth strategies to America’s up-and-coming families with a combination of 21st century tech and trusted advisors. We help families determine how, where, and when to invest and save on taxes in plain-English, with minimal time and effort. Steward can help determine the best way for you to save taxes, or we can at least get the conversation started. Give it a try here.

Do you want someone to guide you and your partner through saving taxes and reaching financial freedom? Reach out to me at ami@oursteward.com or schedule a free 15 min consultation to see if we’re a good mutual fit.

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Written by Ami Shah & Ilija Wan-Simm

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