Broker Check

Your Tax Return…the key to after-tax wealth

What is your biggest budget expense item? For most of our clients the answer is…Income Tax!

What can we do about it? - Plan ahead!

The best time to start income tax planning is when you have last year’s completed return.

What can we control?                                                                           What can’t we control?

Can Control

  • Structure of our investment portfolios
  • How we may take advantage of financial market volatility

Cannot Control

  • Current tax rates
  • Financial market volatility 

Planning Techniques

Libraries of books have been written about the following techniques we may implement for a more effective approach to reduce the impact of income taxes. And…guess what?…they are all out of date every time congress updates the rulebook!

We will comment, at a very high level, on various techniques that may be suitable given your personal facts and circumstances.

  • Your marginal bracket - is the percentage of tax you pay on your last dollar of income. In 2020 if you file jointly and your adjusted gross income is between $171,051 and $326,600 your marginal bracket is 24%, which is the impact on additional money that may be earned or saved from using some of the techniques referenced below.
  • Which investments are generally taxed as ordinary income at the higher rates?
    • Bank interest, CD interest, government, and corporate bond interest, et. al.
    • Much of the dividends from foreign stocks.
    • Short term capital gains Form (1040 Schedule D Part I)
    • Non-qualified portion of income dividends from mutual funds and ETFs.
    • Taxable interest (Form 1040 item 2b; Schedule B Part I)
    • Ordinary dividends (Form 1014 item 3b; Schedule B Part II)
    • Note: Ideally you may want to own more of these higher-taxed investments in retirement accounts only subject to tax when taking money out, not when receiving income.
  • Which investments are generally taxed at lower tax rates?
    • Tax exempt income (i.e. from most municipal bonds; Form 1040 item 2a)
    • Qualified dividends (Form 1040 item 3a)
    • Long term capital gains (Form 1040 Schedule D Part II)
    • Note: Ideally you want to own more of these investments outside of retirement accounts.
  • How can you invest and reduce current taxes at the same time?
    • Contribute the maximum to tax-deductible retirement plans.
    • Consider tax deductible KEOGH or Solo(k) plans for directors’ fees and other consulting income.
    • Harvest tax losses when markets and securities are down and below their cost basis. See our article.
  • Other considerations:
    • Consider giving low-basis stock rather than cash.
    • Consider using Qualified Charitable Distributions (QCD) when you are over 70 ½.
    • Bunch your charitable deductions every other year if you are unable to itemize.
    • Consider donations to a Donor Advised Fund.
    • Consider the impact of taxable gains when you rebalance your portfolio.
    • Consider putting low cost basis mutual fund positions, especially those with significant built in capital gains, on cash dividend payout to avoid compounding capital gain distributions.
    • When you need distributions from investments to pay for spending shortfalls, consider developing a distribution strategy rather than investing purely for higher yields. Reaching for yield may increase risk and reduce growth potential.
    • Run a “What if” scenario to evaluate whether it may make sense to convert some of your taxable retirement plans to Roth retirement plans.
    • Use tax-smart charitable giving techniques:
    • Your primary investment objective should be good economics…not tax avoidance. Old Wall Street adage: “Don’t let the tax tail wag the investment dog

Action steps

  • Review last year’s tax return and look for sources of tax that may be avoided in the future.
  • Engage in a discussion with your tax preparation professional.
  • Engage in a discussion with your investment professionals.


Our goal with this short article is to both stimulate a tax-awareness mentality but also present a few of many additional ideas that may enable you to increase your after-tax wealth.

Please contact us to discuss any questions you have or schedule a meeting.

This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions.