There are many tax strategies that are overlooked levers for improving investment outcomes. Reviewing a client’s tax return isn’t just a compliance exercise—it’s an opportunity to identify meaningful, actionable ways to reduce tax drag and improve long-term financial outcomes. When integrated with a thoughtful investment plan, tax planning becomes a powerful tool to grow and protect wealth. Below are four key strategies that consistently provide value for investors looking to maximize after-tax returns.
1. Asset Location for Tax Efficiency
One of the simplest and most effective tax strategies is placing the right investments in the right accounts. Tax-inefficient assets—such as taxable bonds or actively managed mutual funds—can generate high levels of ordinary income and short-term capital gains. These are best placed in tax-deferred or tax-free accounts like IRAs or Roth IRAs. Meanwhile, tax-efficient assets like index funds or municipal bonds (focus on the tax-equivalent yield) are often better suited for taxable brokerage accounts. Reviewing a client’s investment income on their tax return can reveal mismatches and provide an opportunity to realign asset location for better after-tax outcomes.
2. Harvesting Gains and Losses Strategically
Capital gain and loss management can significantly reduce a client’s tax liability year over year. Tax-loss harvesting—intentionally selling securities at a loss to offset gains—is especially useful in volatile markets. Conversely, in low-income years, realizing long-term capital gains up to the 0% bracket can help “fill the bracket” without additional tax cost. Reviewing Schedule D each year helps identify whether clients are consistently realizing gains without offsetting losses—or sitting on valuable loss carryforwards that could be put to better use.
3. Roth IRA Conversions in Low-Tax Years
Roth IRA conversions can be a powerful tool when timed correctly. By converting pre-tax IRA assets to a Roth in lower-income years, clients can pay taxes at a temporarily reduced rate and enjoy tax-free growth going forward. This strategy is especially valuable for early retirees or business owners with income fluctuations. A marginal tax rate analysis using the prior year’s return—plus a projection—can clarify whether it makes sense to execute a partial conversion without pushing the client into a higher bracket.
4. Managing the Net Investment Income Tax (NIIT)
The 3.8% NIIT can surprise high-income investors, especially those with significant passive income. Planning to reduce adjusted gross income (AGI) or shift investment income into tax-exempt categories—such as municipal bonds—can help reduce or eliminate this surtax. Reviewing AGI trends and the sources of investment income can provide valuable insight into how exposed a client is to the NIIT and how to mitigate it through smarter investment selection or charitable giving strategies like donor-advised funds or qualified charitable distributions.
Note that there are plenty of other strategies including real estate (short term rental, cost segregation), using capital loss carry forward, etc. To discuss what strategies might fit better your situation, reach out to our team of CPAs.
Link Investopedia – Tax-Efficient Investing: A Beginner’s Guide
Link The Tax Adviser – Beyond the forms: The tax return as a beacon for financial planning
