Taxes Reduce Net Investment Returns
Forty-one states impose a tax on capital gains. Those rates averaged 6.37% for the 2020 tax year. But for investors residing in California, the maximum state capital gain rate was 13.30%. When these state taxes are combined with Federal taxes, the combined tax burden on investment returns can exceed 50%. Fortunately, there are resources available to investment advisors to mitigate this drag on investment returns. Simplicity Solutions can employ a number of different tax management techniques as a value-added service that can reduce or defer this tax burden.
Tax Loss Harvesting
Tax-loss harvesting has long been recognized as a way to increase after-tax returns in a portfolio. Advisors have traditionally examined gains recognized through the end of the tax year as part of year-end tax planning. Next, they look for unrealized losses that can be realized or harvested in offsetting transactions. Unfortunately, the optimal time to look for losses is often not at the end of the tax year. As the market cycles up and down throughout the year, there can be multiple loss harvesting opportunities.
Wash Sale Monitoring and Avoidance,
While loss harvesting is simple as a concept, it can be challenging to implement successfully. Most advisors know that once a trade is placed to realize a tax loss, that the same security (or any substantially equivalent security) cannot be purchased for thirty days. These trades are called wash sales, and the losses realized are not available for tax purposes.
Tax Efficient Transitions
Tax-efficient portfolio management often begins before the first trade. Frequently accounts are funded with low-cost basis securities. And unless the client is willing to realize all their embedded capital gains, some or all of these holdings will need to be retained.
Clients frequently want to establish a tax budget. Whether as part of a portfolio transition strategy or routine portfolio management, clients use tax budgeting to eliminate unexpected year-end tax liabilities. Fulfilling these requests can be difficult as gains are often realized due to routine manager trades or re-balancing. Simplicity Solutions can utilize ongoing gain/loss matching to reduce the net realized gains from these trades while honoring the client’s tax mandate.
Investment advisory and sub advisory services offered through Simplicity Solutions, LLC, a SEC Registered Investment Adviser. Simplicity Solutions is wholly owned by Simplicity Financial Marketing Holdings, Inc. and an affiliate of Simplicity Wealth, LLC, a SEC Registered Investment Adviser. Please review the ADV 2A for complete details. *TD Ameritrade, Inc. is one of the firms that we use to custody our client assets. TD Ameritrade, Simplicity Solutions, and the other entities named are separate and unaffiliated firms, and are not responsible for each other’s services or policies. TD Ameritrade does not endorse or recommend any advisor and the use of the TD Ameritrade logo does not represent the endorsement or recommendation of any advisor. Brokerage services provided by TD Ameritrade Institutional, Division of TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. Used with permission. *Salesforce, Salesforce.com and others are all trademarks of Salesforce.com and are used here with permission. Morningstar® Managed PortfoliosSM are model portfolios offered to Simplicity Solutions, LLC by Morningstar Investment Services LLC, a registered investment adviser and subsidiary of Morningstar Investment Management LLC. Morningstar Managed Portfolios are intended for citizens or legal residents of the United States or its territories and can only be offered by a registered investment adviser or investment adviser representative. Simplicity Solutions has full discretion to invest client accounts in accordance with a Morningstar Managed Portfolio model or to deviate from the model. In no way should the use of a Morningstar Managed Portfolio by a Simplicity Solutions client be viewed as advice or establishing any kind of advisory relationship with Morningstar Investment Services, who is not acting in the capacity of advisor to individual investors. Morningstar Investment Services is not affiliated with Simplicity Solutions, LLC. Morningstar Investment Services does not guarantee that the objectives of a portfolio will be achieved or that negative returns can or will be avoided in any of its model portfolios.
Copyrights 2022 Simplicity Solutions All right Reserved