Achieving your investment goals isn’t just about maximizing returns. Reducing tax liabilities in your portfolio can also play a key role in helping you build wealth over the long run. As you review your income and portfolio, consider these steps to help reduce taxes on your investments:
5 Steps that May Reduce Taxes on Your Income and Portfolio
Oct 23, 2024
A key strategy for boosting long-term investment returns is being smart about tax efficiency.
Key Takeaways
- Minimizing tax liabilities in your portfolio can play a key role in helping you build wealth over the long run.
- Tax-loss harvesting can help reduce the amount of capital gains taxes you may have to pay on investments.
- Federal estate and gift tax exemptions can provide opportunities for strategic legacy planning.
Tax Management Services
Taxes can make a big difference over the long run in helping meet financial goals – so you need a tax-smart edge. Learn how Morgan Stanley Tax Management Services can help efficiently manage your capital gains with a complimentary and fully personalized experience.
Meeting financial goals takes a combination of planning and an inventive edge. There is no one winning strategy. The best strategy may be a combination that’s constructed just for you. And at Morgan Stanley, we can build that together.
But there’s one component that is often overlooked—even though it can make the biggest difference over the long run: taxes.
Taken together, tax-aware solutions, may potentially add up to 2% to your annual returns, on average, depending on your specific portfolios and approaches.
By adding our complimentary -- and personalized -- Tax Management investment platform to your taxable managed account, we can help maximize your potential after-tax return, year-round. That’s our Total Tax 365 approach.
Do you want to be more in control of your capital gains each year? Our platform enables you to set gain or tax limits that put you in control of the impact of taxes on your investments. Because after all, taxes are personal.
While tax-loss harvesting is common for many investors these days, it tends to be labor intensive. Morgan Stanley’s advanced platform lets you design your own tax-loss harvesting experience.
For instance, you can select the loss harvesting frequency, your loss targeting approach or customize our opportunistic tax-loss harvest feature that systematically identifies losses to capture throughout the year.
And when losses are created, we look to preserve those losses by adhering to certain IRS wash sale rules so that those realized losses can help potentially offset future gains.
In today’s market, every trade decision matters. But how you tax-optimize your trades may matter even more.
That’s why we also provide our best-tax-outcome approach when trading your securities. This feature looks through your various tax lots and attempts to achieve the most favorable tax outcome on every sale transaction.
Lastly, if you are considering transitioning assets to Morgan Stanley, but are concerned about large capital gains and subsequent taxes, don’t be.
Our sophisticated platform helps you unwind existing positions into a new diversified investment portfolio gradually, and on your terms.
And every step of the way, we report back results that show how much tax savings you may have captured over time. Because the returns you keep are the ones that count.
So, when working to meet your financial goals, you set the rules. Together, we’ll refine your strategy … and offer the tax-smart edge that puts you in control of your assets and your wealth.
Contact your Morgan Stanley Financial Advisor and ask how to enroll in this complimentary service.
Clients may elect Tax Management Services for the account by notifying their Financial Advisor, and indicate what Maximum Tax or Realized Capital Gain Instruction is desired for the account, if any. The Tax Management Services Terms and Conditions attached to the Morgan Stanley Smith Barney LLC Select UMA ADV brochure as Exhibit A will govern Tax Management Services in the account. Review the Morgan Stanley Smith Barney LLC Select UMA ADV brochure carefully with your tax advisor. Tax Management Services are not available for all accounts or clients and may adversely impact account performance. Tax Management Services do not constitute tax advice or a complete tax-sensitive investment management program. There is no guarantee that Tax Management Services will produce the desired tax results.
Diversification is no guarantee of profit and does not protect against loss.
There is no guarantee that tax-loss harvesting will achieve any particular tax result.
When Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors (collectively, “Morgan Stanley”) provide “investment advice” regarding a retirement or welfare benefit plan account, an individual retirement account or a Coverdell education savings account (“Retirement Account”), Morgan Stanley is a “fiduciary” as those terms are defined under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and/or the Internal Revenue Code of 1986 (the “Code”), as applicable. When Morgan Stanley provides investment education, takes orders on an unsolicited basis or otherwise does not provide “investment advice”, Morgan Stanley will not be considered a “fiduciary” under ERISA and/or the Code. For more information regarding Morgan Stanley’s role with respect to a Retirement Account, please visit www.morganstanley.com/disclosures/dol. Tax laws are complex and subject to change. Morgan Stanley does not provide tax or legal advice. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account.
Morgan Stanley, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning, charitable giving, philanthropic planning and other legal matters.
©2024 Morgan Stanley Smith Barney LLC, Member SIPC CRC 6177372 2/2024
1. Employ Tax-Loss Harvesting
Tax-loss harvesting is a tax-efficient investing strategy that can help minimize the amount of capital gains taxes you have to pay on your investments. Capital gains are generally the profits you realize when you sell an investment for more than you paid for it, and capital losses are generally the losses you realize when you sell an investment for less than you paid for it. “Harvesting” your unrealized capital losses allows you to offset capital gains.
If you wish to maintain similar portfolio exposure while avoiding a “wash sale” (which would disallow the current use of the loss), you can sell the original holding, realize the loss, then buy back the same or substantially similar security after a minimum of 31 days.
Using Morgan Stanley’s Total Tax 365, your Financial Advisor can help you “harvest” any losses year-round to offset capital gains. In addition, Morgan Stanley’s sophisticated tax-management platform lets you design your own tax-loss harvesting experience. For instance, you can select the loss-harvesting frequency, choose your loss-targeting approach or customize with our opportunistic tax-loss harvest feature that systematically identifies losses to capture throughout the year.
2. Carry Your Losses Forward
Another strategy to consider is carrying over capital losses from one year to offset capital gains in another year. If you have offset all your capital gains and still have capital losses remaining, you can potentially apply up to $3,000 of capital losses to offset your ordinary income, thereby further reducing this year’s tax liability. If you have additional losses that aren’t captured, carry those capital losses forward next year. There is no limit to how long you can carry capital losses forward into the future across your lifetime.
3. Minimize Taxes on Foreign Investments
Do you hold international securities in your investment accounts?
Investors holding international securities are often subject to withholding taxes by foreign governments on investment income (dividends and interest). If double taxation treaties exist between the country where you reside and where the issuer of the security is based, you may be entitled to reclaim all or some of these foreign taxes, but you must do so within the statute of limitations.
In addition, certain foreign tax amounts may be credited against United States federal income taxes, which should be discussed with your tax advisor. Talk to your Morgan Stanley Financial Advisor about foreign tax reclaim services.
4. Maximize Your Health Savings Account Savings
If you are enrolled in a qualifying high-deductible health plan (HDHP), you may be eligible to contribute to a Health Savings Account (HSA). The funds you contribute to an HSA are generally tax deductible if directly made by you or, if allowed by your employer, may be made by pre-tax salary reduction contributions by your employer.
Any earnings in HSA accounts generally grow income tax-free, and distributions may be income tax-free if used to pay for qualified medical expenses like medication, doctor’s fees and X-Rays. State and local tax treatment may vary.
HSA funds remain in your account from year-to-year if they aren’t spent, and you retain ownership of the account if you leave your job or switch health plans.
You have until your tax filing deadline without extensions to contribute funds to an HSA account.
For 2024, contribution limits rise to $4,150 for an HSA for individual coverage or up to $8,300 for family coverage. If you have more than one HSA account, your total contributions to all HSA accounts cannot be more than these limits.
5. Take Advantage of Higher Estate and Gift Tax Exemption
The 2024 federal estate and gift tax exemption is $13.61 million per individual or $27.22 million for a married couple.
These higher exemption amounts were provisioned for in the 2017 Tax Cuts and Jobs Act and are currently set to expire after December 31, 2025, when they would revert back to the pre-2018 exemption level of $5 million for an individual taxpayer and $10 million for married couples, indexed for inflation from 2010.
Clients should consider taking advantage of the higher exemption amounts now with estate planning strategies in anticipation of the sunset. For example, you may want to consider funding an irrevocable trust to use these higher exemption amounts while they are still available.
How a Financial Professional Can Help
With Total Tax 365, your Financial Advisor can integrate tax aware solutions, including Tax Management Services, into your investment plan to help you minimize the impact of taxes in your portfolio.
In addition, if you have complex tax planning needs, your Morgan Stanley Financial Advisor can connect you to experienced tax professionals from U.S.-based providers across the country to help ensure your tax strategy is optimized.
Connect with your Morgan Stanley Financial Advisor to learn more.
Footnotes:
1 Internal Revenue Service, IRS provides tax inflation adjustments for tax year 2024, Nov. 9, 2023, https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024
Disclosures:
When Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors (collectively, “Morgan Stanley”) provide “investment advice” regarding a retirement or welfare benefit plan account, an individual retirement account or a Coverdell education savings account (“Retirement Account”), Morgan Stanley is a “fiduciary” as those terms are defined under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and/or the Internal Revenue Code of 1986 (the “Code”), as applicable. When Morgan Stanley provides investment education, takes orders on an unsolicited basis or otherwise does not provide “investment advice”, Morgan Stanley will not be considered a “fiduciary” under ERISA and/or the Code. For more information regarding Morgan Stanley’s role with respect to a Retirement Account, please visit www.morganstanley.com/disclosures/dol. Tax laws are complex and subject to change. Morgan Stanley does not provide tax or legal advice. Individuals are encouraged to consult their tax and legal advisors.
This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be appropriate for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
A client may elect Tax Management Services for the account by notifying their Financial Advisor, and indicate what Maximum Tax or Realized Capital Gain Instruction is desired for the account, if any. The Tax Management Services Terms and Conditions attached to the Morgan Stanley Smith Barney LLC Select UMA ADV brochure as Exhibit A will govern Tax Management Services in the account. Review the Morgan Stanley Smith Barney LLC Select UMA ADV brochure carefully with your tax advisor. Tax Management Services are not available for all accounts or clients and may adversely impact account performance. Tax Management Services do not constitute tax advice or a complete tax-sensitive investment management program. There is no guarantee that Tax Management Services will produce the desired tax results.
Please see the Morgan Stanley Smith Barney LLC Select UMA Form ADV Wrap Fee Brochure (the “Morgan Stanley ADV”) for more information on the Select UMA Investment Advisory Program. The Morgan Stanley ADV is online at www.morganstanley.com/ADV. Select UMA® is a registered service mark of Morgan Stanley Smith Barney LLC.
Consulting Group is a business of Morgan Stanley Smith Barney LLC.
Tax reclamation services are provided by GlobeTax and not Morgan Stanley. Accordingly, Morgan Stanley assumes no liability for GlobeTax’s services.
International investing may not be appropriate for every investor and is subject to additional risks, including currency fluctuations, political factors, withholding, lack of liquidity, the absence of adequate financial information, and exchange control restrictions impacting foreign issuers. These risks may be magnified in emerging markets.
© 2024 Morgan Stanley Smith Barney LLC, Member SIPC.
CRC#6445899 (03/2024)