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Q4 2015
Tax-Smart Investing

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Taxes — especially when not managed properly — can erode investment gains and minimize progress towards your financial goals.

Taxes — especially when not managed properly — can erode investment gains and minimize progress towards your financial goals. Uncertainty around taxes can add to your psychological discomfort as well as increase the potential to make the wrong decisions.

In times like these, every investor needs to examine and possibly rethink investment tax management. This article will discuss:

  • The evolving tax code and what it means to you,
  • Why investors are likely paying more taxes than necessary
  • Most importantly, the tools available to fight uncertainty and help you keep more of what you make — in any market environment.

Current federal income, estate and gift tax rates
  • The top marginal income tax bracket is 39.6%.
  • The top long-term capital gains rate is 20% (not including the 3.80% Medicare surtax).
  • Qualifying dividends continue to have tax-favored treatment.
  • The Medicare tax rate on households with an earned income of more than $250,000 increased from 1.45% to 2.35%. The same increase occurred for singles with earned income of more than $200,000. There is no income ceiling for the Medicare tax. The Social Security wage base for 2015 is $118,500.
    • A new Medicare tax was introduced for the same group earning investment income at a rate of 3.8%. The surtax applies to: taxable interest, dividends, capital gains, passive activity income, rents, royalties and annuities. The surtax does not apply to municipal bond interest.
  • The estate and gift tax exclusion amount is $5,430,000 for 2015 indexed for inflation. The top tax rate is 40%. The annual gift exclusion amount is $14,000 for 2015.

How much damage could be done?

It’s important to keep in mind the impact of taxes on hard-won investment gains. According to the Investment Company Institute (ICI), at year-end 2008 more than 92 million shareholders (82% individuals, 18% institutions) owned the majority of the $9.6 trillion assets invested in mutual funds that year.

These investors paid approximately $736 million in 2009 due to short-term capital gains taxes, $149 million in long-term capital gains taxes and $12 billion because of taxes on dividends. Basically, these investors on average gave up almost 1% (0.98%) of earnings to taxes.

And while those numbers are disturbing, they are from a year in which the tax burden had been relatively light. Finally, consider that those taxes covered little more than holding the fund and reinvesting gains, essentially a buy-and-hold strategy.

Here’s another way to assess the damage of taxes. A hypothetical $100,000 portfolio invested in 60% stocks and 40% bonds in 1979 would have grown to $5.1 million before taxes by 2014. However, with no efforts to mitigate the tax effect, Uncle Sam would have eaten 51% of the gain, lowering the investor’s wealth to just a little more than $2.5 million.

Out with the old, in with the new

“Taxes take an enormous bite out of an investor’s return — but the good news is that you can do something about it,” said Brian Langstraat, President of Parametric Portfolio Associates, whose firm helps investment managers implement tax management strategies.

Given the potential damage of overpayment, the management of taxes must be a cornerstone of an investor’s planning process. It calls for employing new techniques and strategies from investment managers and more sensitivity to the tax consequences of portfolio implementation.

More to the point, the manager of a traditional mutual fund buys and sells securities with the interests of the fund in mind, and not necessarily the tax consequences of the investor. It’s for this reason that we also offer tax-managed funds and tax-efficient separate account strategies.

Tools to ease your uncertainty

The growing list of tools available to managers of tax-managed portfolios and other tax-advantaged investments reflects their growing popularity.

Think of each as navigational tools to help you stay on course to your financial destination. While none of these tools is guaranteed, each can be very helpful in managing tax consequences:

  • Tax-lot accounting: A method of accounting for a securities portfolio in which the manager tracks the purchase, sale price and cost basis of each security. This allows the manager to “swap” a batch of stocks with long-term gains for a batch with smaller, short-term gains.
  • Loss harvesting: Allows the manager holding a stock at a loss to sell all or part of it to realize the loss and create an “asset” that may help offset some future gain.
  • Wider rebalancing ranges: A wider rebalancing range can help reduce the number of trades made to your portfolio within a range of the target allocation, say a 60% equity and 40% bond allocation, which may lead to lower realized capital gains and corresponding taxes.
  • Gain-loss offset: Involves selling securities at a loss that have dropped in price at year-end to help offset gains from selling securities that have increased in price.

There are other tools that fall within the category of “tax-aware” trading: delaying the sale of stocks that are about to become a long-term holding; identifying the most tax-advantaged stock sales for the purpose of making charitable donations; and identifying the most tax-advantaged (high-cost basis) stocks to sell for investors seeking regular income from their portfolios.


RubinBrown Wealth Advisors help clients identify, prioritize and achieve their financial goals and objectives utilizing an experienced group of professionals that can integrate income taxes, estate taxes, financial planning, risk management and investment management needs, all in one place, throughout their lifetimes.

RubinBrown Advisors may only transact business in any state if we are first registered, excluded or exempted from the applicable registration requirements. Follow-up, individual responses or rendering of personalized investment advice for compensation will not be made absent compliance with applicable state registration requirements or an applicable exemption or exclusion.

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