Much like people scramble to shed a few pounds before summer vacation, it’s not uncommon to see people frantically searching for ways to minimize their taxes due as April looms. Inevitably, when the vacation ends or tax season is over, many of the procrastinators look back despondently and think, I could have done better.

This pattern appeared again recently, as I heard steady chatter from investors who ended up paying more taxes than they had anticipated. But could it have been possible for them to save themselves from that unpleasant surprise (and spare a good chunk of change in the process)? You bet—if only they had been planning all year. But don’t just take our word for it. This sketch by our friend Carl Richards sums it up perfectly.

There are, of course, facets of wealth management that lie outside the realm of our control. At first, taxes would seem to fall into that category. Truthfully, though, there are steps all investors can take to minimize their taxes due. But planning can’t wait until the last minute.

Moving forward, here are four best practices to tame your taxes before April.

Tax-Loss Harvesting: Those familiar with tax-loss harvesting may assume that losses are best harvested in April, when taxes are top of mind. In reality, tax-loss harvests can be utilized whenever market conditions and the investor’s best interests warrant it.

Enroll in Tax-Favored Accounts: Examples of tax-favored accounts include IRAs, Roth IRAs, 529 plans, and Healthcare Savings Accounts (HSAs). Opening these accounts as appropriate can keep a lid on your taxes when April rolls around.

Asset Location: To put it simply: minimizing a portfolio’s overall taxes due entails locating the most tax-efficient holdings in taxable accounts and the least tax-efficient holdings in tax-deferred or tax-free accounts.

For example, income from real estate investment trusts (REITs) are best-suited for an IRA where it won’t be taxed until retirement. Alternatively, mutual funds, ETFs, and stocks are best-suited for taxable investment accounts since capital gains taxes are generally lower than typical income taxes.

Tax-Wise Charitable Giving: In addition to helping a cause you believe in, charitable giving is also favorable for optimizing your taxes. Specifically, opening a Donor Advised Fund can enable investors to avoid capital gains tax on their securities and deduct the total value of the contribution from their federal income taxes. Appreciated long-term investments are the ideal asset to contribute to a Donor Advised Fund.

Do you want to get ahead of the curve in 2020 with these tax-planning strategies? I’m happy to walk you through them in detail. Schedule a quick call with me.

There are many aspects of wealth management we cannot control. Tax codes evolve. Global events come and go. The markets will go up and down. By carefully minimizing taxes due, we can exert an important degree of control over maximizing end returns – the kind you get to keep as your own.

It starts with our annual tax packets. Each year, we aggregate our clients’ Form 1099s from Schwab, and deliver them to their tax professionals for timely and efficient tax-filing.

That’s just one small thing. We are working all year round to help our clients keep a lid on their taxes due. Below are additional examples:

• Asset Location: Locating the most tax-efficient holdings in taxable accounts, and the least tax-efficient holdings in tax-deferred or tax-free accounts, to minimize a portfolio’s overall taxes due.
• Tax-Loss Harvesting: Acting on opportunities to reduce taxes through tax-loss harvesting when appropriate.
• Tax-Managed Funds: In taxable accounts, using tax-managed funds whenever possible, to reduce the capital gains and dividends that fund managers must pass on to shareholders.
• Tax-Favored Accounts: Helping clients establish tax-favored IRAs, 529 plan accounts, Healthcare Savings Accounts (HSAs) and similar accounts as appropriate.
• Charitable Giving: Helping clients shift their tax-wise charitable giving plans following the Tax Cuts and Jobs Act of 2017. For example, implementing Donor Advised Funds and Qualified Charitable Distributions when appropriate.
• Estate Planning: Collaborating with clients’ estate planning and insurance professionals to consider advanced planning strategies for minimizing and covering taxes due upon estate transfer.

So, this spring – or any time of year – let us know if you’d like to explore how you might increase your overall wealth by decreasing your taxes due.

One thing is certain when it comes to investing, taxes make a big difference in after-tax returns.

A recent article in The Wall Street Journal, “Individual Stocks vs. Index Funds: The Next Frontier,” discussed direct indexing as an advanced technique to potentially save on capital gains taxes. Instead of owning a single investment representing a sector or asset class, direct indexing means buying the hundreds or thousands of stocks individually that make up that asset class. While it’s a useful technique to aggressively harvest tax losses, the complexity involved is likely too much for most investors.

Carolyn Geer with the WSJ quotes Fran Kinniry, investment strategist for the Vanguard Group, as saying that “most investors would be better off simply holding tax-efficient investments, such as broad-market index funds and municipal-bond funds, in taxable accounts, and holding tax-inefficient investments, such as taxable bonds, in 401(k)s and individual retirement accounts.”

At Hill Investment Group, we agree. Here are our three main strategies to help increase after-tax returns:

• Optimizing asset location (as previously mentioned here)
• Tax-loss harvesting
• Using low turnover investments and tax-managed funds

According to Vanguard research, the first category alone can add up to 0.75% in annual returns, depending on the mix of investments.