If tax season resulted in you owing more to the IRS than you expected, you may want to revisit your investment-related tax strategies. Doing so can help put you in a better position and avoidhaving to face unexpected surprises. These steps can help.
Review your investment portfolio for tax efficiency
1. Review the location of your investments.
▪ Do you have investments in taxable accounts that distribute nonqualified dividends or taxable interest?
▪ Do you have actively managed funds that are generating significant capital gains?
▪ Could these investments be held in tax-advantaged accounts instead?
2. Evaluate the tax impact of the types of investments you select for your taxable accounts.
▪ Compare taxable bonds or bond funds with tax-exempt bonds or bond funds. Determine which are better for your situation.
▪ Work with a financial advisor to identify investments that will distribute primarily qualified dividends. Qualified dividends generally are taxed at the preferential long-term capital gain rates while nonqualified dividends are taxed at ordinary income tax rates.
▪ Mutual funds can distribute capital gains at year-end, delivering income that may be difficult to predict. If this is a concern, review other investment options that could offer more control over the recognition of capital gains.
3. Identify any unexpected taxable events that occurred. Determine if they are going to reoccur and think about actions you may want to take to help mitigate that impact.
Formulate your plan
Work with both your tax advisor and your financial advisor to build your overall plan.
First, schedule an appointment with your tax professional to discuss your situation and review your tax projection. Running multiple-year projections can assist with determining when to increase or decrease income and/or deductions.
Then, follow up with your financial advisor to evaluate your portfolio strategies and any investment changes that may help reduce your tax bill. If you’re nearing retirement, a financial advisor can also run multiple scenarios to help you understand the potential portfolio and tax implications of your retirement income strategy.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisorsto determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
This article was written by/for Wells Fargo Advisors and provided courtesy of Whitney McDaniel, CFP®, AAMS®, Financial Advisor in Beaufort, SC and Hilton Head Island, SC at 843-681-1413
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