March 08, 2020

It’s What You Make After Taxes

Go pull your tax returns for the past few years. Specifically, look at your 1040, line 6 – Capital Gains. Maybe you said, “Hey, I made a $100,000 profit.” And maybe, your CPA said something like, “Relax, tax rates have never been this low.” Or, “I’d rather pay taxes on a profit than have a loss.”

I will wager you have no idea how much you paid in tax related to your investments. I’ll double down and bet that if you asked your CPA or broker what you could do to lower taxes even further, they didn’t tell you about asset location, or tax efficient funds.

By owning certain investments in different types of accounts, you can minimize taxes – both current and in the future. Dividends are taxed differently than interest income. The IRS gives you a tax deduction if you harvest a loss - but the deduction isn’t available in your IRA or 401(k). Do you own stocks or mutual funds that own stocks in your IRA or 401(k)? If so, why?

I challenge you to answer these questions:

  • If you own equity mutual funds outside of your IRA or 401(k), what was the capital gain distribution in each of the past few years?
  • Why would you want to own a fund that made a distribution?
  • What will the distribution be in 2020 as a result of the market decline in Q1?

You may be thinking - I’m back to even. But how cruel will this (very realistic probability) be: you’re back to even, but you own a hefty tax bill since your fund has a large distribution in December.

As we head into the final quarter of the year, some tactical actions can be taken to minimize your taxes for this year. Just as importantly (if you believe tax rates are going up), now is the time to position your account for 2021 and beyond.

Most financial advisors, brokers – whatever you want to call people in this industry – focus on accumulation. It’s the American Way. I liken it to climbing Mt. Everest: you always see the picture of the people on top of the world. But did you know most of the deaths occur on the way down? Is your financial Sherpa skilled at navigating the descent? Are they a CPA or CFP? Remember – it’s not what you make, it’s what you make after taxes.

The information contained herein are for informational and educational purposes only and is not intended to be a substitute for specific financial, accounting, legal or tax advice. Individuals should seek independent advice from a qualified professional based on their unique circumstances.



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About the Author

Adam Yofan

Wealth Advisor

Putting his deep and diverse experience to work, Adam spends his days helping clients address their multilayered issues in areas such as portfolio construction, tax minimization, retirement planning, asset protection, and estate and legacy planning. When financial challenges become complex, Adam quickly and nimbly pulls together the right team of professionals, coordinates recommendations and then puts comprehensive strategies into play.