Travis Pickens'  Instablog

For most investors, absolute portfolio return is the most important factor.  This is somewhat unfortunate because there are many other factors to consider such as inflation-adjusted return, risk adjusted return, benchmark performance, and post tax return.  This paper will cover some of the basic steps to take to increase your after tax returns.

Tax efficient structure:

Most people already get the basic idea here and use 401(k)'s and IRA's for much of their investing.  What many people are missing though is the use of these vehicles in combination with their taxable accounts.  It is critical to put tax dis-advantaged products such as fixed income, mutual funds (especially if they have turnover issues), and short-term investments into the tax deferred accounts.  If there are additional funds to be invested outside of these vehicles, this money should be put into more tax advantageous products such as stocks and exchange traded funds.  It can become tricky to balance this with liquidity needs for emergency funds etc. but it can be done.

Cognizant of taxes:

The investments held outside of the tax deferred accounts should ideally be very long term holdings. Anytime a trade in a taxable account occurs, the investor must consider not only the potential increased return of the alternative product but also the potential decrease in investing power by incurring a tax liability.  For example, a $10,000 long term stock holding in ABC Co. has a 50% gain and the investor is considering selling this holding for XYZ Co. because he believes XYZ will have higher returns.  The question becomes, will the increased returns make up for the fact that the investor will no longer have $10,000 to invest but will instead only have $9,250 after paying the 15% capital gains tax on ABC.  The answer lies in the investor’s time horizon as well as any external factors not considered here such as other tax losses, which could be used to offset these gains.

Harvest taxes:

This technique is typically used to offset capital gains an investor has but it can also be used to take full advantage of the $3,000 maximum allowable capital loss deduction.  The basic idea is simple; sell the assets in which you have a loss in taxable accounts.  All of the losses can be used to offset any gains you have and an additional $3,000 can be deducted from your ordinary income.  While you will want to consult your tax professional for advice specific to your situation, there are a few basic things to remember about tax harvesting. First of all, you cannot repurchase the asset or a substantially identical asset for at least 31 days from the time you recognize the loss.  Secondly, if you only do this at year-end, your portfolio performance will likely suffer.  Securities that are down in a given year can come under selling pressure at year-end, which causes performance abnormalities.  Therefore, tax harvesting is best done throughout the year.