Prepare your portfolio for possible tax code changes: Bank of America
Time is running out for a host of money-saving provisions in the tax code, and now is a good time to streamline your portfolio and minimize taxes, according to Bank of America. The Tax Cuts and Jobs Act (TCJA), which took effect in early 2018, overhauled the federal tax code. It nearly doubles the standard deduction, adjusts personal income tax brackets, lowers most tax rates and imposes a $10,000 cap on state and local tax deductions. Unless Congress acts, a series of provisions in the law will take effect at the end of 2025, which could worry taxpayers. “TCJA expiration could mark the largest tax increase in history, worth $4.60 [trillion]”, Jared Woodard, investment and ETF strategist at Bank of America, wrote, noting that the combined tax burden on American households will increase by $2 trillion over the next five years. “According to some estimated, the top fifth of households could pay between 2-6% of their income in taxes,” he added. With that context, Woodard gave investors Some steps to help prepare their portfolios for higher tax environments: Stick with tax-efficient ETFs In general, exchange-traded funds are more tax-efficient than their mutual fund counterparts. Theirs tend to have higher turnover – that is, buying and selling of the underlying securities – and by law they must distribute mutual capital gains not sell stocks for capital gains tax: None For example, a fund manager who sells some of its holdings for a profit or cash out to departing investors will incur capital gains and this amount will need to be distributed to shareholders. for the same investment, taxable events mean investors pay a corresponding 1.3% premium. per year compared to just 0.4% for ETFs,” Woodard said. He added that an investor who invested $100,000 in the S&P 500 ETF in October 2013 and held on today would net $359,000. This compares to a balance of $316,000 if it were an S&P 500 mutual fund. Think of dividend-paying stocks versus bonds. Stocks with qualified dividend income may also receive tax breaks for investors who hold them in a brokerage account. Qualified dividends are subject to tax rates of 0%, 15% or 20%, depending on the investor’s taxable income. On the other hand, interest income from bonds is typically taxed at the same rate as ordinary income – up to 37%. It should be noted that this treatment is different from municipal bonds, which are tax-exempt on a federal basis and may be exempt from state taxes if the investor resides in the issuing state. Meanwhile, Treasury income is subject to federal income tax but is exempt from state and local taxes. Investors should remember that tax considerations are just one of the factors affecting their investment portfolio. That is, the tax-friendly aspect of dividends won’t motivate you to buy stocks if your risk appetite and goals suggest bonds would be a better choice. Look for tax-saving opportunities for your holdings Take a look at your portfolio and see if there are any opportunities for tax-advantaged returns, Woodard says. “Many ETFs take advantage [qualified dividend income] and return for tax-efficient distribution,” he wrote. For investors looking for income, the strategist mentions high-yield municipal bonds, which “offer a yield base adjusted for taxes 6-7%, 350 basis points higher than the US aggregate bond index. Funds on his radar include the SPDR Nuveen Bloomberg High Yield Municipal Bond ETF (HYMB), which has an expense ratio of 0.35% and a 30-day SEC yield of 4.32%. VanEck High Yield Muni ETF (HYD) has an expense ratio of 0.32% and a 30-day SEC yield of 4.16%. Woodard also calls for limited partnerships. These instruments trade like stocks, but benefit from a partnership structure as their income distributions are not subject to corporate tax. higher yields on active ETFs, the strategist highlights Global X MLP & Energy Opportunity ETF (MLPX) and Global X MLP ETF (MLPA). Both of these services have an expense ratio of 0.45%. about 34%, while MLPA has a total return of more than 14%.
