Tax Planning Considerations as we Approach Year-End

It’s often said that it’s not what you make but what you keep that matters. With income, capital gains, and estate taxes all subject to potential increases in the coming years, coupled with current low-interest rates, it’s particularly important that we manage our clients’ after-tax returns as we evaluate portfolios leading into year-end. We believe measuring and reporting tax-adjusted returns, as a result of tax-efficient strategies in our portfolios, both on a pre-and post-liquidation basis, provides a more accurate picture of net results. 

As we approach the 4th quarter, we wanted to take this opportunity to explain how we are evaluating each of our client’s portfolios as we manage and prepare them for their 2021 tax liability.  

In addition to the continual oversight of portfolio allocation and performance, we also maintain the following principles when evaluating our client’s investments for tax efficiency:

Project Taxable Gains:
At the end of the third quarter, we make a projection of all clients’ taxable gains for the year. We run a realized gain/loss report which shows net short- and long-term gains or losses on transactions we have made so far during the year in taxable accounts. We also contact fund managers for estimates of short- and long-term gains distributions which they will be passing through to our taxable accountholders from mutual funds.

Create Optimal Gain/Loss Realization Strategy:
For each client, we determine an optimal tax strategy with regard to capital gain/loss realization. While most clients want to minimize taxable gains, there are some in low tax brackets for whom it may actually make sense to trigger some gains while they can take advantage of paying zero or minimal tax. For most of our clients with realized capital gains, we seek out opportunities to offset those gains by harvesting losses where possible. Short-term losses are given top priority since they directly offset short-term gains which are usually taxed at a higher rate. Since unused realized losses can be carried forward to future years, we will generally strive to be more aggressive in harvesting losses to provide us with the flexibility to rebalance portfolios in the future free of tax constraints. 

Maintain Proper Asset Location:
While asset allocation is an important factor in overall returns and allowing our clients to pursue their goals, we also pay close attention to asset location. Asset location determines which securities should be held in tax-deferred accounts and which should be held in taxable accounts to maximize after-tax returns. We consider various factors including our clients’ withdrawal needs and investment holding periods, as well as the tax and return characteristics of the underlying securities in their portfolios, all in an effort to offer optimal tax management.  

Maintain Adequate Liquidity:
Throughout the year, but particularly when taxes are due, we ensure that our clients are maintaining adequate liquidity to pay their tax bills. For those paying quarterly taxes, that includes evaluating their portfolio quarterly to ensure we maintain cash sufficient to pay quarterly estimates, as well as supplying adequate reserves for the end of year liability, as well.

Communicate with Advisors:
We maintain communication with our client’s accountants to allow them sufficient time to strategize and plan for any tax liabilities derived from their investment portfolios. Additionally, we also encourage our clients to proactively reach out to their accountants and help facilitate those meetings as necessary.
We think smart tax management is more important than ever, as we work with clients to maximize their returns and keep more of what they make. By integrating tax considerations into the day-to-day management of our portfolios while balancing the overall big-picture design of our client’s portfolios, we maintain a strategy that helps our clients pursue their goals.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

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