It’s that time of year again—March Madness! Oh, and, time to gather information for your tax professional (or TurboTax for the DIYers in the crowd). Tax “season” marks the time when the annual ritual of Americans scrambling to make sense of 1099s, K-1s, deductions, etc. meets the looming deadline of April 15th . But while most people only think about taxes when the deadline is looming, a good investment advisor should have tax planning and tax execution baked into their process all year long.
Wait, Tax Execution? What’s that and Why is it relevant to my Investment Advisor?
Even though we are investment professionals (and not tax experts) tax planning and related execution should still be part of what a good (great?) investment advisor does for their client. Tax planning is the more nuanced part of the tax work (relatively speaking). It’s all about strategy—minimizing future tax burdens to the extent possible, optimizing tax-efficient investments, and structuring withdrawals intelligently. It’s the blueprint. Tax execution, on the other hand, is where the rubber meets the road. To be clear, we are not completing tax returns… we leave that to the tax experts. For an investment advisor, tax execution means making sure those well-laid plans actually happen—trades get executed, tax impact on gains/losses is considered, and capital gains distributions don’t sneak up and bite us. Without execution, tax planning is just a bunch of smart ideas that never actually save you a dime.
Two Critical Tax Matters for Investors
Investment professionals who get taxes “right” can help their clients keep more of what they earn. While a full list is likely too much for this brief missive, here are two key tax considerations that shouldn’t be an afterthought:
1. Tax-Loss Harvesting (The Art of Turning Lemons into Tax Lemons-ade)
Nobody likes losing money, but not all losses are created equal. Tax-loss harvesting allows investors to sell losing investments, use those losses to offset capital gains (and even a small amount of ordinary income), and then reinvest in similar—but not “substantially identical” (thanks, IRS wash-sale rules!)—investments to maintain market exposure. Markets move up and down and losses are a part of investing. Our task is to consider taking the loss and resetting the investment in a way that makes sense from both an investment perspective and tax efficiency.
Tax execution tip: This isn’t just a December activity! Loss-harvesting opportunities pop up throughout the year, and advisors should monitor portfolios regularly to lock in tax benefits when they arise—not just in a last-minute, end-of-year scramble.
2. Managing Asset Location (and allocation)
We talk about asset allocation (how you divide up your investments) all the time, but what about asset location? It’s the practice of putting the right investments in the right tax buckets to minimize the payment to the U.S. Treasury (and the State Departments of Revenue). Typically…
- Tax-efficient investments go in taxable accounts.
- Tax-inefficient assets belong in tax-advantaged accounts like IRAs or 401(k)s.
- If you’re charitably inclined, gifting highly appreciated stocks directly to charity avoids capital gains taxes altogether.
Tax execution tip: Your advisor should be proactive about asset location—not just tell you, “Oh, you should’ve put that bond fund in your IRA” after you’ve already paid unnecessary taxes. At East Franklin Capital, we think about what investments go in which account through the tax lens AND the estate planning lens.
The Bottom Line
Tax planning isn’t just for CPAs in April—it’s a core part of smart investing year-round. Your investment advisor should be fluent in tax strategy and execution, ensuring that plans are put into action and tax bills are minimized to the extent they can be. If they’re not, it’s time to ask some hard questions—or find someone who can actually help you keep more of what you earn.
Happy tax season! (Or, if your advisor is doing their job, happy low-tax investment season all year long.)
