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Small Tweaks Can Lower Clients’ Tax Liability

May 11, 2015

Now that tax season is over, advisors can take a cool-headed look at their clients’ portfolios with an eye to optimizing their after-tax performance for 2015.

The first step toward a more tax-efficient portfolio is to avoid triggering the 43.4% short-term capital gains tax, InvestmentNews writes. Holding a security for 366 days or more brings the rate down to a more manageable 23.8%.

Advisors should also steer clear of wash sales whenever possible, according to InvestmentNews. Selling at a loss and buying back the same security — or a substantially similar one — within 30 days postpones or even erases the loss. To capture it as an offset against gains in the portfolios, investors must wait 31 days before buying back the security.

Losses in general should be used — or harvested — to reduce tax liability, allowing the prudent advisor to use market volatility as a tax-optimizing tool. To achieve this, advisors need to keep a close eye on every trade and its tax consequence, according to InvestmentNews.

Finally, advisors should take advantage of investments generating non-taxable income — for example, recommending municipal bonds when putting together the fixed-income piece of a portfolio. Similarly, when building the equity allocation, advisors can steer clients toward stocks that pay qualified income — always taxed at 23.8% — rather than regular dividends, which can be taxed as high as 43.4% depending on the client’s income bracket, InvestmentNews writes.

By Alex Padalka
  • To read the InvestmentNews article cited in this story, click here.