Displaying items by tag: taxes

For decades, the wealthy have been able to see huge tax savings. Over one hundred years ago, investors could take tax deductions on wash sales, which involved selling a security at a loss and then buying back the same security. While Congress outlawed that technique in 1921, investment firms have continued to help billionaires save on taxes through other techniques such as tax-loss harvesting, which allows an investor to sell an investment for a loss and replace it with a reasonably similar investment. Direct indexing, which continues to gain steam among advisors, provides the perfect strategy to employ tax-loss harvesting. In a recent article, ProPublica authors Paul Kiel and Jeff Ernsthausen reported on the tax savings techniques of billionaires. The authors were able to reconstruct the tax-loss strategies of some of the nation’s wealthiest people using IRS data. For instance, they estimated that from 2014 through 2018, Goldman Sachs was able to generate tax savings of $138 million for Steve Ballmer, former CEO of Microsoft and current owner of the Los Angeles Clippers, without changing his investment portfolio in any meaningful way. In the year 2017, Ballmer’s direct indexing accounts posted over $100 million in tax losses through 15 loss-harvesting transactions, while the performance of the indexes it tracked, was way up. Tax records also show that Goldman Sachs routinely made trades for direct-indexing clients like Ballmer.

Finsum:Based on recent reporting by ProPublica, billionaires such as Steve Ballmer have been able to save billions through tax-loss harvesting in direct indexing accounts.

Model portfolios have been gaining ground with advisors. Close to $350 billion in assets sat in model portfolios as of March 2022, according to a Morningstar report in June. That’s a 22% increase over the prior nine months. But how do advisors incorporate model portfolios into their business? In a recent article, ThinkAdvisor asked different advisors how models fit in their practice. Erik Nero, founder, and president, of First Step Wealth Planning LLC, thinks they are a boost to small firms. He uses them for close to all of his clients except the client portfolios that need more customization. Kyle Simmons, lead financial planner, at Simmons Investment Management uses his own model portfolio but warns advisors not to get attached to models, as clients can come in with legacy holdings and tax consequences. Jan Pevzner, principal, of Gotham Block LLC finds models to be a great starting point for a “generic client” as it can save you a lot of time. Jon Ulin, CEO of Ulin & Co. Wealth Management uses models in addition to comprehensive planning for clients, which isn’t typically provided by robo-advisors. Nate Creviston, manager of wealth management and portfolio analysis, at Capital Advisors, does not use model portfolios at all as they lack tax awareness and believes each client deserves a customized portfolio unique to their needs and goals.

Finsum: With model portfolios gaining ground with advisors, ThinkAdvisor interviewed several advisors on how models fit or don’t fit into their practice.

Direct Indexing is being touted as the best way to generate tax alpha in a portfolio but is it all that it's cracked up to be? Experts say it has limits and diminishing marginal returns over time because as stocks are dropped, replacements with a lower cost basis will be more expensive to unload later on. Moreover one of the less talked about aspects is that as opportunities narrow as stock is unloaded there is less upside to growth opportunities as the portfolio is smaller. Investors should look to capitalize on direct indexing as they offload specific accounts for inheritance and retirement which is a relatively more minor portion of the portfolio.

Finsum: There may be a shift from custom indexing as a primary ESG focus if it fails to deliver tax alpha and is better suited to dropping greenwashers.

President Biden’s 2023 federal budget levy’s a new ultra-wealthy tax that would apply 20% total income tax on those with a net worth of more than $100 million. Notably in the deal, it opens the window to tax unrealized capital gains or any asset growth. The bill is expected to meet a brick wall in congress however as even moderate Dems will have a difficult time supporting it. Biden’s selling point is the expected $360 billion in payments toward the deficit in the next decade. However, the senate proposed a very similar bill last year that was shut down by congress.

Finsum: Taxing unrealized gains is a slippery slope, and hopefully would never trickle down to different wealth classes.

Crypto could be a stress inducer when it comes to managing their tax solutions. However, a variety of portfolio products help investors navigate their digital wallets, track crypto investments, and manage their tax solutions. These portfolio trackers can help investors navigate the nuanced complexities in capital gains taxes that are constantly evolving. CoinTracker, TokenTax, and CoinLedger are all great crypto portfolio managers. TakenTax really lets investors take advantage of tax loss harvesting to optimize their crypto portfolio.

Finsum: Cryptos wash rule differences should incentivize investors to take advantage of tax loss harvesting.