Tips on Tax Efficient Investing for Corporate Executives

As we enter Tax Season, it's important to review the key taxes affecting your tax return and explore tax-efficient strategies to start implementing in 2024. One often overlooked tax expense for high-earning professionals is the taxes generated from their investment portfolios. While the income tax on your W-2 earnings may rightfully take the spotlight, managing the taxes on your investments is vital for three reasons:

1. Long-Term Impact: Investment taxes affect you for the rest of your life, well beyond your high-earning years.

2. Taxes Increase in Retirement: Taxes on investments typically increase as your wealth grows resulting in high taxes during your retirement.

3. Control: You have the power to manage the taxes on investments with simple tax efficient strategies such as Asset Location, Tax Loss Harvesting and Minimizing Trading in Your Portfolio.

Let's delve into the three primary types of Investment Taxes and discuss some straightforward, tax-efficient strategies. By implementing these strategies, you can retain more of your savings, allow them to compound over several years, and build your wealth faster.

#1 Dividend Income Tax

Definition: Taxes on capital paid out to shareholders as opposed to reinvested in the company's operations, taxed at 0% - 40.8%.

Qualified Dividends: In general, qualified dividends are paid out by domestic corporations and some qualified foreign corporations. Qualified dividends are taxed at 0%, 15%, or 20% based on your income level.

Non-Qualified Dividends: These are taxed at your ordinary income tax rates. You want to minimize non-qualified dividends in taxable accounts.

Real Estate Income is typically taxed at your ordinary tax rate. While there are tax advantages to owning Real Estate, you will pay your ordinary income tax rate on dividends from a Real Estate Investment Trust (REIT) or Net Income from a real estate property.

Here are some tips on Managing the Dividend Tax:

1. Place high dividend paying securities in tax-advantaged accounts such as your 401(k), IRA or Deferred Compensation Account.

2. Minimize holding high dividend paying stocks. Consider increasing exposure to growth-oriented stocks, as they are not only more tax-efficient, they also generally have the potential for higher returns.

#2 Interest Income Tax

Definition: Taxes on the capital paid out to creditors in exchange for lending capital to a company or government entity, taxed 0 - 40.8%.

Corporate Bond Interest: Interest received from a private company is taxed at your ordinary tax rate.

U.S. Treasury Interest: Interest paid out by the U.S. government is taxed at your ordinary income tax rate but is not taxed at the state or municipal levels.

Municipal Bond Interest: Interest paid out by a municipality is exempt from federal taxation and is typically not subject to state-level taxes if the taxpayer files a tax return in that specific state.

Here are some tips on Managing and Interest Income Taxes:

1. Implement an asset location strategy, placing highly taxed securities in tax-advantaged accounts such as 401(k), IRA, and Deferred Compensation Accounts.

2. Continue to diversify your portfolio. It is not advisable to completely avoid less tax-efficient securities, such as bonds and real estate, at the expense of a diversified portfolio.

3. Consider municipal bonds in your taxable accounts.

#3 Capital Gains Tax

Definition: Taxes paid on investment gains (Sale Proceeds minus Cost Basis) when selling a security, taxed at 0% - 40.8%. The two types of capital gains tax are:

Short-Term Capital Gains Tax: Applied to investment gains on securities that you own for less than a year. Short-term capital gains are highly taxed at your ordinary income tax rate. You want to minimize short-term capital gains in taxable accounts.

Long-Term Capital Gains Tax: Applied to investment gains on securities you own for more than a year. Long-term capital gains are taxed at 0 - 23.8%. If your taxable income is below $553,850 for Married Couples ($492,300 for Single) your tax rate will not exceed 18.8%.

Tips for Managing Capital Gains Tax:

• Minimize short-term capital gains, subject to higher tax rates.

• Implement low-turnover investment strategies to minimize short-term capital gains tax and defer long-term capital gains taxes.

• Utilize Tax Loss Harvesting to offset taxable gains by selling positions at a loss.

• Consider gifting highly appreciated stock to charities to eliminate capital gains tax and allow the charity to receive more.

Wrap-Up

While investment taxes might fly under the radar compared to income tax, managing them is paramount as they impact you for the long term. Fortunately, implementing strategic approaches can help navigate and mitigate these taxes.

At Taurus Financial Planning, we incorporate these strategies into our investment management process. If you're seeking guidance on optimizing your tax bill, schedule a consultation with a Financial Planner to explore potential avenues for reducing your tax burden.

Thanks for reading.

Mark Chisenhall, CFA, MBA

Financial Planner and Founder I Taurus Financial Planning

Taurus Financial Planning is a Fee-Only Wealth Management firm based in Bentonville, AR. The firm offers comprehensive financial planning, tax planning and investment management to corporate executives across the country.

Taurus Financial Planning is a Registered Investment Advisor with the State of Arkansas. This information is provided as a guide to assist you in your financial planning. The specific examples are provided for illustration purposes only and are not representative of specific investments or guarantees of future returns. Please consult with a professional for specific questions regarding your particular situation. If there is any error or inconsistency between this document and the official company plan documents, your company plan documents will govern.

This publication is for informational purposes only and is not intended as tax, accounting or legal advice or as an offer or solicitation of an offer to buy or sell or as an endorsement of any company security fund or other securities or non securities offering. This publication should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made by the Author, in the future, will be profitable or equal the performance noted in this publication.