How to Minimize Taxes on a Taxable Account

Hey welcome to this segment on eight ways to minimize your taxes and taxable investment accounts. These are typically going to be like brokerage accounts. Maybe you inherited one or maybe even opened one up. What those look like is I’m going to use for my visual learners out there, I’m going to use this manipulative. So we buy a stock and it overtime appreciates. What we’re going to be talking about today is what are we going to do with that appreciated interest or sometimes it’s a bad investment and there’s a loss. There’s silver lining on both sides of that coin. And so here’s some strategies about how to minimize the taxes on the interest that you have. The first thing would be to understand the difference between the ordinary tax rates and the long-term capital gains tax rate. But the first graphic that you’re going to see up on your screen will have our ordinary income rates. And what they do is each level of income gets taxed at a different rate. You look, you can follow where you are whether you’re single, married, married filing jointly or separately, head of household and so forth. And what you’re going to see is it starts at 10% and then you get to next threshold, it goes to 12%, 22%, 24%, 32%, 35% and 37%. So depending on how much income you’re making, you’ll just go up the bracket. On the other side, we’re going to look at what the long-term capital gains rates are. Those have three different brackets I would like to highlight. They have 0% tax rate, 15% tax rate and 20% tax rate. I hope your mind and your eyes were drawn to that 0% tax. That’s what we want to try to hit. So how might we be able to do that? Let’s first talk about some strategies. When you buy an asset in these taxable accounts and it makes money, if you sell that asset within a year, this money that you’ve realized, that gain that you’ve realized is going to go over under the ordinary income tax rate. The first chart that I was talking about. If you wait a year longer, if you hold the asset for at least a year, now this gain can go over to the better tax preferred rates of the long-term capital gains. So you wait one year, one day, we sell this and now we have a different rate that this gets taxed at. The next thing that you could do is consider a buy and hold strategy. This is where you buy a stock or a bond and you hold it. The only time a taxable event happens is when you sell that position. So when you buy and hold and it’s making money, great. We want to stay aware of what those gains are, but by understanding the two different rates that you could get taxed at, you now can control how to want to deal with that gain. And what if there’s a loss? I just had a client come in and they had some bond strategies that were carrying losses. We sold those positions. We were able to realize a loss and I’ll talk to you more about that in a later strategy here. But it was very tax efficient for them. The next thing what happens when you’re holding these stocks is that you might get a dividend. And so that dividend does become taxable unless you can get it to become a qualified dividend. And there’s some rules and some eligibility that you have to make sure that you look into in order for it to be a qualified dividend. But then that qualified dividend can move over to those long-term capital gain tax rates. Again, tax efficiency. The next thing that you might do is choose tax efficient bonds. It doesn’t just have to be stocks. You might get a muni bond, otherwise known as a municipal bond. Maybe an I bond. Those are super hot this year and last year because of the interest rates and the inflation rate. You might get some U.S. treasuries. And so when you’re using those, the only thing you have to be careful of is do the math between the rates. For example, let’s say that you have a municipal bond yielding 2% and you’re in the 35% tax bracket. That would give you an after tax yield of about 3.08%. Now what you want to do then is compare that to what bonds are just paying in these taxable. Because you could find that yeah, it sound cool that your muni bond might be saving some taxes, but at the end of the day if the yield isn’t better on an after-tax standpoint, then let’s go get the better return. If you wanted to summarize all of that in the previous five point then what I would be able to do that is what your asset allocation is when it comes to your different accounts. If you have tax efficient strategies, maybe those are better for your IRAs, your 401Ks, your Roth IRAs. Tax efficient strategies in this taxable account would help you understand your tax allocations and could be a more effective way for you to save taxes not only in the year of, but in subsequent years. The next thing is to talk about maybe what a charitable Trust might look like. You know if you want to donate some of these appreciated assets to a Trust, a charitable Trust, there’s a couple of different options. That could give you not only the tax help on the year of contribution, but also have some rules on distributions. So if that’s of interest, definitely reach out and we can help you with that. And finally, the tax loss harvesting where sometimes we want to sell those underperforming assets in order to realize that gain and bring that into our tax account. So if you have any questions, please feel free to reach out at any time for a long-term tax plan. Have a great day.