By Robert Shapiro CPA, Financial Advisor, Branch Manager – RJFS
An integral part of a well-designed financial plan is tax management. Each tax season investors look back at the monies paid for taxes and search for better methods to save. Tax efficient investing at Shapiro Financial Group involves proactive planning, execution, and monitoring. Utilizing 80 years of experience and the depth of Raymond James resources, we seek to construct personalized strategies to minimize taxes for the current investor and for the generations to come.
While capital gains are taxed at lower rates than ordinary income, they should be managed. Actively managed mutual funds are not tax efficient and are best served in retirement accounts. Mutual funds pass investors net gains, not losses, and even in years in which the fund may experience a decline in value. A separately managed account (SMA) for stocks or bonds provides the benefits of direct ownership. This includes the opportunity to harvest losses and control capital gains. Tax loss harvesting for fixed income has been timely given the rapid rise in interest rates.
Investors have benefited from rising stock prices, some with outsized gains or concentrated positions. Some examples are large positions in mega technology stocks, concreted positions from employment, and embedded gains from an SMA. The sale or diversification of these positions can result in significant tax liabilities. At Raymond James, however, there are Direct Index tools available to help qualified investors. Direct Indexing attempts to maximize after-tax wealth in an SMA. An advantage of the Direct Index is that it can be funded using your existing stock portfolio, cash, or other approved assets. Portfolio managers use active tax loss harvesting techniques to offset realized gains in the portfolio. Tax-managed strategies such as Direct Indexing can help alleviate tax liability, minimize capital gains, and plan for future events.
By now, my readers and clients can recognize my affection for tax-free income. When considering marginal combined Federal and State rates, investors would lose more than half of their taxable interest to taxes. A well-constructed professional municipal portfolio includes consideration of credit quality, duration, issuer, call protection, and current cash flow. Here are a few tips. After the expansion of the alternative minimum tax (AMT) exemption, investors should consider the added yield from selected municipal bonds that pay interest subject to AMT. Further, avoid deep discount municipal bonds, which are typically lower than current coupons and may create taxable original issue discount (OID) income.
Our practice is skilled in advanced planning techniques. Sophisticated financial plans commonly utilize trust(s) to achieve goals. The step-up market value adjustment at the time of death remains a valuable resource. A common error is funding trusts during one’s lifetime with highly appreciated assets. The beneficiary assumes the donor’s basis, thereby missing out on the stepped-up tax basis adjustment, subjecting the beneficiary to additional capital gains. The current estate and gift tax exemption of $13.61M per person provides relief and opportunity to many. However, this window may close at the end of next year. The exemption is scheduled to revert to prior levels of $5M indexed for inflation. We help clients, along with their legal counsel, design and implement sophisticated financial plans to maximize and retain wealth while minimizing taxes.
As a boutique firm, we provide personalized service to our clients. We believe that efficient tax management can add meaningful long-term returns. If you can benefit from professional investment management along with advanced financial planning, I invite you to contact me directly. I welcome the opportunity to help you and your family prosper.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Shapiro CPAs is not a registered broker/dealer and is independent of Raymond James Financial Services.