Investing in a Tax-Efficient Manner​

During periods of uncertain returns, it becomes even more important to consider other ways to increase your portfolio’s value. One of those strategies is to invest in a tax-efficient manner.


Taxes can significantly reduce your portfolio’s value. Interest income from taxable portfolios and distributions from 401(k) plans and individual retirement accounts are taxed in the year received, at ordinary income tax rates of up to 39.6 percent (unchanged from 2013). Taxes are not paid on unrealized capital gains in taxable accounts. When the asset is sold from a taxable account, however, you must pay taxes on those capital gains, at a maximum long-term capital gains tax rate of 20 percent. The 20 percent rate only affects singles with taxable income above $400,000, married joint-filing couples with income above $450,000, heads of households with income above $425,000, and married individuals who file separate returns with income above $225,000.


Capital gains on investments held for one year or less are short-term capital gains and are taxed at ordinary income tax rates of 10, 15, 25, 28, 33, 35, or 39.6 percent in 2014 (unchanged from 2013).


Using strategies that will defer the payment of taxes for as long as possible can make a substantial difference in your portfolio’s ultimate size. Consider the following tax-efficient strategies:


Minimize portfolio turnover. Carefully evaluate your investment choices, selecting those you’ll be comfortable owning for years. That way, you can let any realized capital gains grow for many years without paying taxes.


Place investments that generate ordinary income or that you want to trade frequently in your tax-deferred accounts. Since income and gains accumulated inside tax-deferred accounts aren’t taxed until withdrawn, you defer paying taxes on that income. (Keep in mind that withdrawals may be subject to a 10 percent federal penalty if made prior to age 59 1/2.)


Analyze the tax consequences before rebalancing your portfolio. Portfolio rebalancing in a taxable account will trigger taxable gains and losses. You should generally avoid selling investments for reasons other than poor performance. You can bring your asset allocation back in line through other means. For instance, when adding investments to your portfolio, only purchase those that are underweighted in your portfolio. Reinvest interest, dividends, and capital gains in investments that are underweighted. Any withdrawals can be made from overweighted investments. Or rebalance through your tax-deferred accounts, which won’t result in current tax liabilities.


Utilize losses to offset capital gains. Selling investments at a loss can offset capital gains for that year, reducing your total tax liability. Excess losses may be used to offset up to $3,000 of ordinary income and the unused portion may be carried forward indefinitely. If you still want to own that investment, you can purchase it 30 days before or after selling it. That way, you will not be subject to the wash sale rules, so your loss will be tax deductible.

Brookfield, WI  

Phone: 414-751-6847

Fax: 866-486-4261


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Phone: 608-824-3002

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