TAX ALPHA: Strategies and Considerations – #2 in Series
Finspire Insights
TAX ALPHA
Strategies and Considerations
by Jason Brooks, CFP®, CPA
Vice President, Private Wealth Management
Finspire, LLC
January 27, 2024
In my last piece [Tax Alpha: What is it, and why is it so important] we discussed tax alpha, which is the increased value created in an investment portfolio by using tax savings strategies. Below I have expanded on a few of these strategies. Keep in mind this only applies to taxable or non-retirement accounts.
CAPITAL GAIN/LOSS STRATEGIES
Idea #1
Harvest capital losses to offset taxable capital gains and to reduce net investment income.
How to implement– Sell stocks, mutual funds, or Exchange-Traded Funds (ETFs) that are trading with an unrealized loss.
Result– Once a sale is executed, a loss is officially recognized and can be off-set against any other capital gains.
Things to be aware of – Make sure you do not buy back the same security within 30 days, or the loss will be disallowed (wash sale rule).
While you can net all short-term and long-term gains and losses, you can only deduct a net loss of up to $3,000 each year on your 1040 tax return. Any additional losses will be carried forward for use in future years.
Idea #2
Consider “low-turnover” investment strategies/vehicles.
How to implement – Invest in stocks, ETFs, or lightly traded mutual funds.
Result – Low turnover means less trading, typically leading to fewer realized gains.
Things to be aware of – Lower turnover investments are not as actively traded as traditional mutual funds. Consider active ETFs which are tax friendly but still actively managed.
Idea #3
Manage holding periods of securities.
How to implement – Try to hold onto securities for at least one year before selling if there is an unrealized gain
Result – Assets held for over a year are subject to long-term capital gains tax rates, which are typically more favorable than the short-term capital gains tax rate.
Things to be aware of – Short term gains are taxed as ordinary income, at your marginal tax rate, which is higher than the rate of tax charged on long term capital gains.
As always, it’s advisable to consult with your tax advisor or financial professional before implementing any of these strategies.
Important Disclosures:
Securities offered through IFP Securities, LLC, dba Independent Financial Partners (IFP), member FINRA/SIPC. Investment advice offered through IFP Advisors, LLC, dba Independent Financial Partners (IFP), a Registered Investment Advisor. IFP and Finspire, LLC are not affiliated.
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