Morgan Stanley
  • Wealth Management
  • Jul 30, 2021

4 Key Tax Questions for Investors to Consider

Factoring the impact of taxes into your investment decisions can help you keep more of your hard-earned money, both now and in the future.

Building and preserving wealth may involve more than maximizing your investment returns. You can also consider your portfolio’s tax efficiency. Even small reductions in your tax costs today could have a big impact on the amount of wealth you’re able to build over time and how quickly you’re able to build it. Tax-efficient planning might also help you preserve more of your wealth for your beneficiaries, whether loved ones or charities.  

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Because tax planning and investment planning often go hand-in-hand, it’s important to ensure that your tax advisor and Financial Advisor are working together to help you put a strategy in place. Consider meeting with them jointly and asking these four questions to help get the conversation started:  

1. How Can I Manage Taxes on My Current Income?

One place to start is to think about minimizing your taxable income. There are numerous ways to do that, but one key strategy is to save as much as you can in your tax-advantaged accounts, including a 401(k) plan and an individual retirement account (IRA). Setting aside pretax dollars in these accounts may help you reduce your taxable income today, while you make progress toward long-term goals, such as retiring with a sizeable nest egg.

If you’re charitably inclined, another way to reduce your taxable income is through charitable contributions. For tax year 2021, you may deduct cash contributions of up to 100% of your adjusted gross income if made to a qualified public charity, subject to certain limitations.1 In addition, for those at least 70½ years old, you can usually make what’s known as a qualified charitable distribution (QCD) to an eligible organization of up to $100,000 per year directly from your IRA, generally with no tax costs to either you or the charity receiving your donation.2 Your tax advisor can guide you on how best to put any of these strategies in place.

Because tax planning and investment planning often go hand-in-hand, it’s important to ensure that your tax advisor and Financial Advisor are working together.

2. How Can I Help Minimize Taxes on My Investments?

In taxable investment accounts, like a brokerage account, it may be a good idea for some investors to consider holding securities for more than a year, so that any appreciation will be taxed at the lower, long-term capital gains rate. If you do need to tap into your investments to free up cash, your Financial Advisor can look at your overall portfolio to identify which assets, including longer-term holdings, may result in a lower tax bill if sold today.

You may also want to consider a longer-term strategy known as tax-aware asset location. This generally involves placing tax-efficient, lower-growth assets in your taxable accounts, while putting higher-growth assets, such as high-dividend-paying stocks, in tax-advantaged accounts to help minimize your exposure to current taxes.

Tax loss harvesting is another way to potentially lower your tax costs in a taxable investment account. When selling investment securities at a loss, you get to recognize a capital loss, which you may be able to use to offset capital gains.3 If you have offset all your capital gains and still have capital losses remaining, you can apply up to $3,000 of excess capital losses to offset your ordinary income. Still have capital losses after that? If so, you can use them to offset income or capital gains in future tax years. 

Your Financial Advisor can look at your overall portfolio to identify which assets, including longer-term holdings, may result in a lower tax bill if sold today.

3. How Can I Lessen the Bite of Taxes on My Retirement Savings?

Just as you consider the impact of taxes while you’re working and saving for retirement, it’s important to be strategic about taxes once you stop working full time and start living off your nest egg.

One such strategy is income smoothing, in which you take future taxes into account when determining how much to withdraw from your retirement accounts each year. For example, you may decide to withdraw more money than you need from certain tax-advantaged accounts, such as traditional IRAs (but not Roth IRAs), earlier than required to lower the balance that’s left when you need to start taking required minimum distributions (RMDs) from those accounts. The reason? Even though you’d have to pay taxes now on the withdrawals, if done correctly, you could avoid being pushed into a higher tax bracket that would result in larger payments when your RMDs kick in. Plus, you’d have more resources to spend and enjoy during the most active years of retirement.  

4. How Can I Preserve More of My Wealth for Family or Charity?

Taking steps to minimize how much of your estate goes to taxes can allow you to leave a larger legacy to the people and causes you care about most. One strategy involves making financial gifts to younger generations while you’re still alive. Federal law allows you to gift up to $15,000 per person per year ($30,000 per person per couple) without owing U.S. federal gift tax. Gifts that exceed that amount will count toward your lifetime U.S. federal gift and estate tax exemption, which for 2021 is $11.7 million per person and $23.4 million per married couple.

If your generosity extends to charities, making arrangements while you’re alive not only can help to ensure that the donation follows your wishes, but also that it can help reduce your taxes now. Donating to a donor-advised fund, for example, allows you to get a current tax deduction for your contribution to the donor-advised fund, while retaining advisory rights over the donated amount, which may grow through investments over time. Your  Financial Advisor can help you make a donation to MS GIFT, a 501(c)(3) public charity structured to offer you a simple, tax-advantageous way to support your favorite charities.

Taking steps to minimize how much of your estate goes to taxes can allow you to leave a larger legacy to the people and causes you care about most.

Bring Your Advisors Together

If you typically work with your Financial Advisor and tax advisor separately, you may find that a closer relationship between them could uncover investment-planning opportunities that could help mitigate your tax liability.

Wondering where to start? Consider a joint meeting to discuss the interplay between your investments and tax situation. This can happen any time of the year. Be prepared to bring your investment statements and your filed tax returns—and consider using these questions to help you get the most out of the conversation. 

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