Tax Optimization Tactics to Enhance Investment Returns

Tax Optimization Tactics to Enhance Investment Returns

Making any investment involves trying to balance tax efficiency with the expected after-tax rate of return. Tax optimisation refers to checking whether the effective tax rate on an individual or firm is minimised by utilising all the available deductions and loopholes to reduce its taxable income, thereby minimising the total tax liability, and deferring the payment of tax as much as possible on its investments.

Tax optimisation is perfectly legal, but it has a moral dimension for many and questions of social responsibility for companies. At Bogart Wealth, we have more than three decades of experience helping clients with tax-sensitive decision making.


However you invest your money, it should always be driven by your goals, cash flow and time horizon – all things that you cannot base your investment decisions upon by just looking at a table ranking funds on post-tax performance. That said, considering tax does contribute to building wealth more quickly – which does, in fact, get you to those other criteria more swiftly.

Tax-exposure management strategies include techniques such as tax-loss harvesting, as well as asset location and rebalancing. Donating more money to tax-advantaged accounts, or charitable gifting, can also generally be brought to bear (depending on your wealth goals). Such steps can boost your wealth’s overall value significantly by reducing your U.S. taxes and improving your after-tax returns.

Bunching also allows you to capture a larger deduction in a single year, which may lower your tax bill and spread out your itemised deductions over multiple years. Combined with tax loss harvesting programmes, this will lead to more tax-efficient portfolios.

Deferring Taxes

Delaying taxes can make a massive difference to your returns Investing strategically can include such things as timing income to reduce tax liability; taking advantage of opportunities to make charitable donations to reduce taxes; or accelerating or deferring income that is taxable.

And sometimes investors overlook having an after-tax return, which could matter a great deal if tax-efficient investing produces hefty returns through Roth conversions and tax loss harvesting, for example.

What tax optimisation does is construct a rather elaborate system to help taxpayers, whether individuals or businesses, meet their obligations under existing tax law and regulations. As such, it digs deep into the complexity of the tax system, so as to devise legal ways and means to lower tax burdens without taking on morally questionable actions. Moreover, in contrast to tax planning, optimisation introduces tax considerations into the overall strategic financial design, including retirement planning, investment choices, business development, and bringing about reporting changes.

Tax-Advantaged Investments

Tax-efficient investing is another approach to saving money on taxes. Depending on the investment type, tax-efficient investors do not have to pay taxes on their earnings each year, meaning they get to keep their earnings. Some tax-efficient investments include municipal bonds and tax-advantaged mutual funds.

Those tax losses can then be used to reduce investment gains for that year or carried forward for use in a future year. A sophisticated practice accomplished by tax-loss harvesting involves the sale of securities that have appreciated for a long time and for which capital losses incur. Those losses would be ‘reharvested’ (ie, the capital losses would be used to offset tax) through purchasing securities that are equivalent but not exactly the same as before, ie, that are very similar but different.

And given enough market volatility, tax-loss harvesting can generate opportunities for further, ongoing tax loss harvesting – though such harvesting opportunities can be stymied by tax-harvesting volatility’s inherent volatility. Rebalancing accounts to add cash (or via a donor-advised fund by gifting appreciated stock) can generate new tax lots that offset ‘tax alpha decay’, of the inevitability that an investment’s after-tax returns will always decline over time.

Tax-Free Income

So taxes can’t entirely be eschewed, but investors can use strategies to limit the bite, for example, by putting money into tax-deductible investments or deferring income to a later date, and taking advantage of tax loss harvesting strategies.

There is more than one way to reduce your tax liability: tax-optimisation may not just lower taxes but also save money by reducing pointless expenses, increasing deductions or exploiting rebates and credits. But this can only happen if you immersed yourself in tax laws and followed any changes in legislation.

Our advisors at Bogart Wealth can help prepare you with tax-smart solutions, tailored to your situation and investment goals, designed to make your financial decisions as tax-efficient as possible – freeing up additional income that you’ve earned, entirely legally. Speak with an advisor at Bogart Wealth today!

Preston Tate

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