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Tax Planning Happens Year Round, Not Just in April

Knowing how your investments affect your tax bill can help you save money not just on April 15th, but for years to come.

Articles by Nick Holeman, CFP®

By Nick Holeman, CFP®
Financial Planning Expert, Betterment
Published: June 7, 2017 | Updated: April 2, 2019

Think about your taxes year-round and make strategic decisions, such as harvesting losses or reorganizing investments.

Simple steps, like investing your tax refund, can go a long way.

By donating securities to charity, instead of donating cash, you can save on capital gains taxes.

Thinking about reducing your taxes may not be your favorite hobby, but the truth is that it can help you keep more of what you earn. While you can’t control the stock market, you can control some of your tax obligations. To identify whether your long-term investment strategy is running efficiently, take a few minutes to review these year-round tax optimization tips.

1. Invest Your Tax Refund

Would you have guessed that a smart place to invest your tax refund is in an IRA? Normally, investors might divert a portion of the refund into this account as part of a well-rounded investment strategy and claim the deductions on your taxes next year. Invest your refund, and you may get a portion of that back in tax savings. Stay in the habit of investing your refund as soon as you receive it, and over time you’ll feel good when you see your returns start to add up.

Note that the IRA contribution limits have gone up in 2019. If you are under 50, you can contribute $6,000 to your Traditional or Roth IRA. If you are over 50, you can contribute $7,000 to your Traditional (if you are under 70 ½) or Roth IRA.

2. Think Several Moves Ahead

Investing is complex and from time to time you might have to sell some of your investments. It might be to rebalance your portfolio or maybe your goals have changed and your investments no longer match their intended purpose.

Smart investors think ahead before blindly selling parts of their portfolio, because selling certain assets could potentially lead to capital gains taxes. By carefully choosing which investments to sell, you can help minimize hefty tax consequences.

One way to do this is to partner with an investing company that has the tools to help make this process easy to access and understand. Here at Betterment, we are continuously rebalancing your portfolio as tax-efficiently as possible, using an automated method we call TaxMin. Further, our Tax Impact Preview tool lets you see the estimated potential taxes on a sale before making the trade.

3. Reorganize Your Investments

Another way to potentially leverage small tax advantages for long-term growth is to organize your portfolio. Move tax-inefficient investments, like international stocks and other assets that are taxed at higher rates and more frequently, into a tax-deferred account, such as an IRA or a Roth IRA. That way, you can enjoy the potential for higher growth while also facing less of a tax burden. Similarly, you can also move tax-efficient assets, such as municipal bonds, into taxable accounts. For further guidance, we’ve outlined the tax implications that accompany each type of investment account here.

As part of your reorganization efforts, you may want to consider setting up a Tax-Coordinated Portfolio (TCP), which allows us to optimize this practice of asset location for you.

4. Benefit from Losses

It’s never fun to watch your assets lose value, but did you know that in some cases, losses can actually benefit you? You can receive a tax deduction for your losses that can help cancel out the taxes you owe on assets that have gained value, or, you can use up to $3,000 worth of realized losses per year to lower your income—and excess losses can even be carried forward.

The practice of selling assets that are currently at a loss in order to reduce your overall tax liability is called tax loss harvesting. You may want to consider our Tax Loss Harvesting+ feature (TLH+), which allows Betterment to automatically capture losses as the market fluctuates.

Smart investors should always remember that investments involve risk and may result in loss.

5. Give to a Worthy Cause

While it’s important to secure your own financial future, many investors see community support as an important additional goal. Consider donating to a nonprofit organization in your community. Not only are you helping to improve the quality of life in your locale, you can potentially claim a deduction from your income taxes. Fortunately, it sometimes can pay to do the right thing.


Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a tax professional for more information.

Contributing Authors

Eric Bronnenkant
Head of Tax, Betterment

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