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4 Ways to Save Money on Taxes Through Portfolio Positioning

Raise your hand if you want to pay more in taxes.


Man, I hope that didn’t work on anyone. If it did, put your hand down, and go read a different blog. This is for people who want to save money on taxes.


There aren’t any strategies that work for everyone, and this post is really only worth reading if you have a taxable investment account or plan to open one. These accounts are also referred to with the following tags: nonqualified, individual, joint, trust, brokerage, etc.


1. Use Passive Investments

This is how I advise the people I work with to invest most of the time anyway - active managers tend to underperform, so you’re likely to get better returns if you invest passively. The added benefit is that, with less buying and selling, passive investments won’t generate as much income in the form of taxable gains, so you’re likely to pay less in taxes as well!


2. Tax Loss Harvesting

We know that our investments aren’t always going to go up. In years that investments are down, you might have an unrealized loss - in that case, you can sell the investment that’s down, so you can report the loss on your taxes. Losses cancel out capital gains, and they can even lower ordinary income by up to $3,000/year. If the whole loss doesn’t get used, the rest carries over to be used in future years.


3. Asset Location

Some investments (like bonds or high dividend stocks) provide most of their returns through income that’s taxable every year. Other investments (like growth stocks) provide most of their income through capital appreciation, which is only taxable when you sell. By owning the high income investments in a retirement account and the high growth investments in a taxable account, you can lower your tax bill without necessarily changing your allocation.


4. Tax Free Income

Municipal bonds (debt issued by cities and states) pay interest that isn’t federally taxed in the US. However, it’s important to note that they typically pay lower interest rates, so this is a strategy best used for high income earners.


Conclusion

This isn’t a comprehensive list, and these strategies won’t apply to everyone every year, but taking advantage of these tax strategies is one of the main benefits of hiring a professional. This is not enough information to implement these strategies yourself. If you’re a DIY investor, please do additional research or work with your tax advisor before implementing these strategies.

 

As always, keep in mind that you don't have to go it alone. Check out my website to see what it's like to work with me and reach out if you have any questions.


If you found this post helpful, help spread the word! But remember, this is solely for educational purposes - it's not advice.



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