6 Tax Planning Strategies for Better Investment Returns

YouTube video player

A mistake we see prospective clients make is not spending enough time tax planning. Their tax planning is usually done after their taxes are filed, if at all. Taxes represent one of the largest drains on a family’s financial assets so managing its effects is important.

“Manage” is a good word for what we do. It connotes controlling what can be controlled and adapting to what cannot be controlled.

Tax rules are plentiful and complex and the number of tax planning twists and turns is vast. It is easy to make mistakes.  However, this complexity provides opportunities for the savvy.

A balanced, long term view is also important.  In addition to those that do little tax planning, we see others make costly mistakes by over emphasizing tax ramifications at the expense of other factors.

This is particularly true when it comes to investments.  Some buy investments touting a tax advantage but they are not likely to be sound investments. Many private deals purporting “write-offs” fall into this category.  We also see people engage in transactions to save taxes today without realizing how much they have increased their future taxes. A common example would be when deferred annuity contracts are sold to low-income seniors.

…complexity provides opportunities for the savvy. 

We have identified six common tax planning strategies from an investment standpoint we use to benefit our clients. There are several more and each could be a newsletter topic itself, but here are the basics:

Portfolio transition – Tax planning begins immediately when we start working with new clients. Because we work directly and exclusively for clients, our advice is not tied to any particular product. Our financial planning process produces a portfolio design and structure that is tailored to each client’s unique needs.  In most cases, we identify changes that should improve the portfolio.  Changes can have costs and tax ramifications.

We certainly want to put clients into holdings which are best for them, but we will not just dump existing holdings blindly.  We see far too many “advisors” do this primarily because their goal is to get the money out of whatever the client owns and into whatever products the advisor sells.  Their compensation is tied to the products. Our goal is to maximize the odds our clients will reach their goals.  Period.  To do this, we seek to minimize all transition costs to only those which are necessary.  In short, after we develop a strategy for our client’s future, we devise an exit strategy from their existing holdings and manage the transition, all of which is done solely in the client’s best interests.

Strategy_think-plan-manageAsset location – Asset allocation is a better known term but asset location is important too.  Some investments are less tax efficient than others. For instance, interest on most bonds, dividends paid by real estate investment trusts, many preferred stocks, and many overseas companies are taxed at ordinary income tax rates. Most municipal bonds pay tax-free interest. Stocks which pay no dividends generate no tax liability until sold.  If held for more than a year, these gains are taxed at long-term capital gain rates which are lower than ordinary income rates for all taxpayers. To the extent it makes sense within a family’s financial plans, by strategically “locating” highly taxed assets in tax sheltered accounts such as retirement plans or IRAs, total portfolio returns can experience less erosion due to taxes.

Tax-efficient vehicles – Some investment products and approaches are inherently more or less tax-efficient than others based on how they are structured and operated.  High turnover strategies, approaches that use leverage, hedge with options or futures contracts, and managers who are free to make large bets or are free to add anything at any time, all tend to produce more taxable income and capital gain distributions than the more prudent, carefully structured long-term vehicles we favor.

Loss harvesting – No one wants losses but all investment assets decline in value from time to time.  By turning a paper loss into a realized loss, taxes on gains and up to $3,000 of ordinary income may be offset in any given year.  Losses that cannot be used for tax reduction in the year the losses were “harvested” can be carried forward into future years.  This is no free lunch.  Loss harvesting can cause future gains to be larger if one is not careful.  Nonetheless, for high tax bracket clients in particular, opportunistic loss harvesting can lower taxes without disturbing a sound, long term investment plan.

For us, tax planning has no “season.” It is a year-round endeavor.

Lot management – Many people and some advisors don’t understand that their brokerage firms have default settings for tracking tax lots and capital gain accounting. Even fewer understand the implications that go along with those settings. We don’t have to go along with the defaults, but we do have to consciously make alterations before a trade settles to get the maximum advantage.

By exercising some strategic thinking in advance, we can control current taxation, influence future taxation, and take advantage of opportunities. For example, some people find advantage in harvesting gains instead of losses in taxable accounts. If you are charitably inclined, a whole slew of other options are possibilities.  For details on the managing of tax lots, see our write up from 2011 and this video on a smart way to make charitable donations.

Managing the impact of cash flows – Leading up to retirement, we save in our accounts. Even if you do not deposit money into your accounts, the accounts experience positive cash flow in the form of interest or dividends.  Eventually, you retire or otherwise make withdrawals.  Too many people buy investments with deposits, reinvest interest and dividends, and then sell investments to generate cash without much forethought.  By intelligently utilizing deposits, interest, dividends, and withdrawals, the tax costs can be minimized and net returns enhanced.

We can also affect taxes by strategically making withdrawals from the type of account or combination of accounts best suited to a client’s situation.  The default for many is to first withdraw from taxable accounts, then deferred, then Roth IRAs. This usually lowers taxes today but these savings are often lost via higher taxes in the future, making other methods preferable.

For most citizens, April 15th represents the end of tax season. For us, tax planning has no “season.” It is a year-round endeavor.

News & Notes

small-web-CharlieMaking a real difference: When Charlie Fitzgerald III, CFP® helped found the FPA of Florida, he hoped the organization could make a real difference for the public and the profession. They have certainly done that.  2015 marks the ninth year the group has travelled to Tallahassee to educate regulators and legislators about important financial planning related topics. On their latest trip in March, they helped influence the Florida Board of Education to change the standards for the required high school semester in Economics. Now, half of the course deals specifically with personal financial literacy and personal financial planning.  Previously, only about two weeks was focused on financial literacy.  This means that our nearly 3 million Florida public high school students will be introduced to and learn about debt management/avoidance, investments, inflation, budgeting, insurance, and taxes. These are important educational building blocks for a sound personal financial future.

Gator to Gator: Charlie recently spoke to students of the Warrington School of Business at his alma mater, the University of Florida. He covered many topics regarding Financial Planning and Wealth Management in the 90 minute session and answered about two dozen questions. “It was a great experience.  I have since received several thank you notes from the students and they have invited me back to speak to the UF Wealth Management Association, a student run association which brings in speakers and holds outreach events to fellow students regarding financial planning topics,” said Charlie.

Form ADV and Privacy Policy:  A copy of page 2 of our 2015 , describing material changes to our firm has At least annually, we must provide you with a summary of any material changes to our firm’s ADV Part 2A disclosure brochure and our firm’s Privacy Policy. Those documents have been delivered to clients via an upload to each client’s portal or attached to quarterly reports for clients that receive those in print.  At any time, if you would like a full copy of our disclosure brochure, contact Sara Nash at ext. 114.

Please remember to call us: When anything significant happens in your life, including changes in your finances, family, or health that could affect your financial plan, please let us know so that we can adapt our planning and portfolio work for you accordingly. Also, if you ever fail to receive a monthly statement for one of the Schwab Institutional or TD Ameritrade Institutional accounts under our management, please let us know so we may assure the respective custodian delivers your statements promptly.

Yours truly,

The Team at Moisand Fitzgerald Tamayo, LLC

Contact Us

If you have any questions or would like to discuss this further, please give us a call, email us or send us a note.

If you are not a client and you wish to receive emails notifications of new posts – no more than monthly – fill out the subscription information in the sidebar to the right. For more frequent updates, subscribe via RSS feed or follow us on Google+LinkedIn, or Twitter    

 

 Contact Us


Moisand Fitzgerald Tamayo, LLC is an Orlando, Tampa and Melbourne, Florida based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between. If you have any questions or would like to discuss anything further, please give us a call or send us a note. If you are not a client and wish to receive emails notifying you of new posts – no more than once per month – fill out the subscription information in the sidebar to the right. For more frequent updates, follow us on FacebookLinkedIn, or Twitter.  

Important Additional Information & Disclosures


Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Moisand Fitzgerald Tamayo, LLC-“MFT”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. 

Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from MFT. 

Please remember that if you are a MFT client, it remains your responsibility to advise MFT, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. MFT is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. Tax advice is given only to clients and only when agreed to by MFT. A copy of the MFT’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request.

Please Note: MFT does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to MFT’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Please Note: Limitations:  While MFT does NOT pay for recognition, awards, or publicity, neither rankings and/or recognition by unaffiliated rating services, publications, or other organizations, nor the achievement of any designation or certification, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if MFT is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers. No ranking or recognition should be construed as a current or past endorsement of MFT by any of its clients.  ANY QUESTIONS: MFT’s Chief Compliance Officer remains available to address any questions regarding rankings and/or recognitions, including providing the criteria used for any reflected ranking.

Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.  It should not be assumed that your MFT account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your MFT accounts; and, (3) a description of each comparative benchmark/index is available upon request.

 

About Dan Moisand

Dan Moisand is a fee-only financial advisor with Moisand Fitzgerald Tamayo, LLC. He is a regular contributor for multiple outlets, including Florida Today, MarketWatch, and The Wall Street Journal. His writing and financial advice have also been featured in Financial Planning, Investment Advisor, Wealth Manager/Advising Boomers, Forbes, Smart Money, and The New York Times, among other publications. He is the only two-time winner of the Journal of Financial Planning’s “Call for Papers” competition and has been named a top financial planner and advisor by multiple publications. Investment News named Dan one of the “twenty most influential men and women” in the history of financial planning. He currently serves on the Board of Directors for the CFP (Certified Financial Planner) Board.

WANT TO KNOW WHEN WE POST NEW MATERIAL?

As a Sanctuary From The Noise®, we only post information we believe timely and important to the long term financial success of our clients. Follow us to receive emails - no more than once a month - about new posts.

We keep your information private and make stopping our emails as easy as starting them.

Something went wrong. Please check your entries and try again.