It’s September – and that means it’s prime time to think about maximizing after-tax returns as the year winds down. Even after investors’ bout with volatility in the late summer, it’s been a strong year for stocks overall, with the S & P 500 up nearly 18% in 2024. Further, even as exuberance around artificial intelligence has driven outsized returns for Nvidia and the tech sector, other areas of the market have perked up: Financials are toting a nearly 20% gain in 2024, while consumer staples are up about 18%. Of course, there may be a price to pay for that performance: Uncle Sam will want his share of taxes. “We are constantly thinking about taxes all year, but it ramps up in the fourth quarter,” said Nathan Hoyt, chief investment officer for Regent Peak Wealth Advisors in Atlanta. “We want to be proactive in a market that has a lot of uncertainty.” Here are a few steps that could help you hold on to more of your portfolio’s returns this year. Sell your laggards and get rebalanced Enough of the year has passed that investors can take stock of which positions have been suffering in 2024. There’s a silver lining: By selling big losers in your taxable account, you realize capital losses, which can offset capital gains elsewhere in your portfolio and help trim your tax bill. “What tax loss harvesting can do is mitigate that feeling of loss in times of downturns or when certain investments don’t perform as well as you had hoped by providing some tax savings,” said Joel Dickson, Vanguard’s global head of enterprise advice methodology. If your losses exceed your realized capital gains, you can also apply up to $3,000 of losses toward your ordinary income and carry over the remainder to future years. Tax loss harvesting can also work in conjunction with portfolio rebalancing — that is, ensuring that your current asset allocation is still compatible with your goals and that none of your positions have become outsized as they have outperformed. Investors should avoid violating the wash sale rule: If you sell an asset at a loss and buy a “substantially identical” security within 30 days before or after the sale, the IRS can disallow the loss. The wash sale rule doesn’t just apply to your taxable accounts — you also must ensure you don’t buy a “substantially identical” security in your retirement accounts or any joint accounts within the stated time limit, Dickson warned. “It’s a bit of a navigational headache.” Asset location to maximize tax savings While reevaluating your holdings, take a look at whether your asset location — that is, which accounts you’re holding certain assets in — is optimized. Having a brokerage account, a traditional individual retirement account and a Roth IRA gives investors an opportunity to minimize taxes while their assets grow and to better manage the tax hit once they start drawing down in retirement. Reviewing asset location is one of the tasks James Shagawat, certified financial planner at AdvicePeriod in Paramus, New Jersey, takes on while rebalancing portfolios. Assets that spin off ordinary income, which is taxed at a rate as high as 37%, may be best placed in an IRA. This is especially the case for most individual bonds and bond funds, which have been paying out higher yields and would benefit from the IRA’s tax-deferred status. Stocks, index funds with low turnover and tax-free municipal bonds are among the assets that are better suited for taxable brokerage accounts. Munis spin out income that’s free of federal taxes, and they may be exempt from state levies if the investor resides in the issuing state. Meanwhile, realized capital gains on stocks that have been held for longer than one year are subject to a rate of 0%, 15% or 20%. High-growth investments can go into the Roth IRA, which has the added benefit of tax-free growth and tax-free distributions in retirement. Income from Treasurys is generally exempt from state and local taxes, which can be valuable for investors who reside in states such as New York, New Jersey or California, Shagawat said. The interest is taxable at the federal level, however. Give sensibly Generous taxpayers get a twofer when they make donations of appreciated stock: There’s the tax deduction that they may capture if they itemize deductions on their tax return, and the chance to thin out highly appreciated positions without a tax hit from selling. “Giving cash isn’t as efficient as donating the stock itself,” said Malcolm Ethridge, financial advisor at CIC Wealth in Rockville, Maryland. For clients who have received sizable lump sums of income, including from equity compensation plans, he has recommended setting up a donor advised fund. These accounts can receive an array of assets, and donors can take a tax deduction in the year they make the gift. Donors can also “bunch” their charitable giving, meaning they make several years’ worth of donations, and spread out the grants they make from the fund. By directly giving low basis highly appreciated stock, instead of selling the position and donating cash proceeds, you avoid incurring the capital gains tax. “Let’s say that you’ve been at Nvidia for five years, and you have stock that vested four years ago and has appreciated significantly over time,” Ethridge said. “Donate the appreciated stock. That’s way more valuable than writing a check to make a contribution.”
