Tax-Managing Your Portfolio: 5 Steps to Cut Your Taxes, Plus 4 Tax-Break Options

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club

Tax-Managing Your Portfolio: 5 Steps to Cut Your Taxes, Plus 4 Tax-Break Options

by Alexander Green, Chief Investment Strategist

Tuesday, November 10, 2009: Issue #1134

According to investment legend John Templeton, every investor's long-term goal should be the same: maximum total return after taxes.

Too many investors forget those last two words. As the years go by, you can save many tens of thousands of dollars by taking advantage of the incentives that Congress has built into the tax laws.

It all starts with tax-managing your portfolio.

Five Steps For Tax-Managing Your Portfolio

When it comes to tax-managing your investment portfolio, here are the five basic steps:

  • If possible, use your retirement account for short-term trading activity. That way, your short-term gains - rather than being taxed at the same level as your income - compound tax-deferred.

  • Minimize turnover in your non-retirement accounts. As Warren Buffett once pointed out, "The capital gains tax is not a tax on capital gains, it's a tax on transactions." Hold winners for at least a year, if possible. If you do, you'll qualify for long-term capital gains treatment at the maximum rate of 15%.

  • Offset capital gains with capital losses. The IRS allows you to offset all of your realized capital gains with realized capital losses. And you can take up to $3,000 in additional losses against earned income.

  • If you invest in mutual funds, use index funds rather than actively managed funds in your non-retirement accounts. Index funds tend to be highly tax-efficient since changes to benchmarks are rare. Managed funds often have high turnover and Federal law requires them to distribute at least 98% of realized capital gains each year. You can get hit with a big capital gains distribution even when you haven't sold a share - and even if the fund is down for the year.

Take these tax effiecient investing steps and you'll substantially lessen the government's tax bite on your portfolio.

Four More Tax-Break Options

The few remaining tax-break choices are simple ones...

  • Own tax-free rather than taxable bonds, especially if you reside in a high-tax state like New York or California.

  • Be sure to fully fund your IRA, 401(k) or other retirement accounts.

  • Buy business equipment before the end of the year, or pre-pay businesses expenses for 2010.

  • Invest in fine art and give it to a charity. The 1995 Tax Act allows you to donate to any IRS-approved charity works of art at their fair market value, not at their cost basis. (The IRS requires you to hold these items for one year in order to donate them at their fair market value.)

Pillar One Advisor Mike Kuschmann, president of Fine Arts Limited, can help. For more information, feel free to contact him at: 800-229-4322 or 407-702-6638. He'll send you a complimentary brochure pack, detailing his services and the tax savings available.

Over the next few weeks, I'll be highlighting several other year-end tips for reducing your tax liabilities.

It's important to heed the words of John Templeton. And remember, it's not how much you make. It's how much you keep.

Good investing,

Alexander Green

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