Warren Buffett trimmed Berkshire Hathaway ‘s Apple stake, capturing gains ahead of an expected tax boost – but what worked for the legendary investor may not be the best move for individuals. The sale reduced the conglomerate’s Apple holding by 13% in the first quarter. Speaking at Berkshire’s annual meeting on May 4, Buffett noted that he expected tax rates to rise , but he didn’t mind paying the 21% rate currently applicable to corporate income. “And if I’m doing it at 21% this year, and we’re doing it a little higher percentage later on, I don’t think you’ll actually mind the fact that we sold a little Apple this year,” he said at the event. The prospect of higher taxes is also on individual investors’ minds. The White House’s latest budget proposal called for a 25% minimum income tax on those whose wealth exceeds $100 million. Further, a bevy of provisions in the Tax Cuts and Jobs Act of 2017 enacted under former President Donald Trump is set to expire after 2025, which would result in the top individual income tax rate reverting to 39.6% from 37%, as well as a sharp cut to the standard deduction (currently at $14,600 for individuals and $29,200 for married couples filing jointly). “I hear this all the time, ‘I should recognize income now. Taxes are going up,'” said Tim Steffen, certified public accountant and director of advanced planning at Baird. “The taxes shouldn’t be the only factor in determining your investment strategy,” he said. “If you have an investment you really like, continue to hold it. If it pays a good dividend, don’t let a tax increase be the sole reason to sell something.” Impulsive attempts to head off taxes Trying to beat a tax increase can backfire. For instance, individuals who convert large sums of money from their traditional individual retirement account to a Roth – which would give them tax-free appreciation and withdrawals that are free of tax, subject to certain conditions – wind up eating a hefty bill from the IRS in the present, Steffen said. That’s because the amount of money that’s converted is subject to ordinary income tax, which can be as high as 37%. Even for those who are taxed at a lower rate, a sufficiently large conversion might bump them into a higher tax bracket. Instead, a measured approach with incremental conversions might be a better way, as this would spread out the tax liability over the years. Similarly, an impulsive move to sell a heavily appreciated holding can also harm, rather than help, an investor. Be sure to work closely with your financial advisor and your accountant to get a sense of how any prospective tax code changes might affect your set of circumstances. “Run the numbers and make sure it makes sense to do it – and do it thoughtfully – that goes for any tax strategy,” Steffen said. Sensible steps for any climate You don’t have to wait for cues from Washington to take a few steps that can improve your portfolio’s tax efficiency and trim your tax bill. Here are a few moves worth considering. Manage your tax brackets . Long-term capital gains taxes have three tiers, depending on an investor’s income: 0%, 15% and 20%. Understand where you are within these brackets and keep that in mind if you need to sell. “Say you’re a corporate executive and you own a bunch of company stock that’s highly appreciated. Maybe stagger the sales over time to manage that 15% bracket,” Steffen said. Keep an eye out for tax-loss harvesting opportunities. When assets in your portfolio fall, consider trimming some of those positions and using those losses to offset taxable capital gains elsewhere. Use the proceeds as an opportunity to rebalance your portfolio and get your asset allocation back to where it needs to be. In a higher tax environment, “tax loss harvesting will become more important, and doing it in a performance-neutral way,” said Jerrod Pearce, a certified financial planner and partner at Creative Planning in Overland Park, Kansas. Strive for tax efficiency within your portfolio. Mutual funds that distribute capital gains every year can be inefficient, as they leave shareholders with a tax bill – even if those investors are staying put. That’s because managers have to sell their holdings to generate the money needed to cash out departing investors, and the capital gains are passed on to the remaining shareholders. Consider gradually winding down those positions if you have these mutual funds. If you like the fund’s strategy, look for a cheaper tax-efficient ETF that you can use instead. Give wisely. Don’t sell highly appreciated assets to generate cash if you’re donating to charity. This move will generate a tax bill on the stocks’ gain. Instead, make a direct gift of appreciated stock directly to your favorite charitable organization or donor-advised fund. Think about “bunching” these contributions – that is, cramming several years’ worth of charitable donations into one year. This way, you maximize the charitable deduction. Just note that your itemized deductions must be greater than the standard deduction to claim this tax break. “Rather than doing small gifts every year, does it make sense to do larger gifts every other year to get the power of the deduction?” said Steffen. “Be more thoughtful about the timing.”
