Morgan Stanley
  • Wealth Management
  • Jun 2, 2020

Steps that May Reduce Taxes on Your Income and Portfolio

A key strategy for boosting long-term investment returns is being smart about tax efficiency.

Achieving your investment goals isn’t just about maximizing returns. Minimizing the impact of taxation in your portfolio can also play a key role in helping you build wealth over the long run. Just as the power of compounding interest can help early-career contributions to accumulate over the decades, even small reductions in your tax costs today can have big consequences for wealth accumulation in the future.

As you review your income and portfolio, consider these steps to minimize taxes on your investments: 

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Employ Tax Loss Harvesting

Work with your Financial Advisor to consider a tax-planning move known as tax-loss harvesting. “Harvesting” your unrealized investment losses allows you to offset taxes on gains and income. Be sure to look at all sources of income, including businesses, outside sales and private partnerships. If you wish to maintain similar portfolio exposure while avoiding a wash sale, you can sell the original holding, realize the loss, then buy back the same security after a minimum of 31 days. If you have a Select UMA account, you can work with your Financial Advisor to access year-round Tax Management Services.  

Spread Out Your Income Realization

When you realize capital gains, timing can have a significant impact on your overall tax liability. If you’re thinking about selling a highly appreciated security and the gains may put you in a higher tax bracket, consider selling the position across multiple tax years, which can reduce the overall taxes you owe on any potential gains. 

Carry Your Losses Forward

Keep track of capital-loss carryovers from prior years. You can offset this year’s gains with a prior year’s losses. If you have offset all your capital gains and still have capital losses remaining, you can apply up to $3,000 of capital losses to offset your ordinary income, thereby further reducing this year’s tax liability.  Still have losses left over?  Carry those losses forward for potential application against future gains.  There is no limit to how long you can carry losses forward into the future.

Minimize Taxes on Foreign Investments

Do you hold international securities in your investment accounts?  Investors holding international securities are often subject to withholding taxes by foreign governments on investment income (dividends and interest). If double taxation treaties exist between the country where you reside and where the issuer of the security is based, you may be entitled to reclaim all or some of these foreign taxes, but must do so within the statute of limitations. Talk to your Financial Advisor about foreign tax reclaim services.

Maximize Your HSA Savings

If you have high-deductible health plan (HDHP) coverage, you are generally eligible to contribute to a Health Savings Account (HSA).  The funds you contribute to an HSA are generally tax deductible, any earnings grow federal income tax-free, and distributions may be income tax-free if used to pay for qualified medical expenses. HSA funds may roll over year-to-year if they aren’t spent.  You have until Tax Day 2020 (July 15th) to contribute funds to an HSA account for the 2019 tax year. For 2019, if your HDHP covers only yourself, you can generally contribute up to $3,500 to an HSA. If you have family HDHP coverage, you can generally contribute up to $7,000 to an HSA. There is also a catch-up contribution limit of $1,000 for those who are 55 or older. 

Speak with your Morgan Stanley Financial Advisor or Private Wealth Advisor and your personal tax and legal advisors to determine which strategies might be appropriate for you.

Learn more about tax-smart strategies for retirement and giving back.