Tax-Efficient Investing

That time of year has arrived! We are all now more aware than ever of our taxes. With payments coming due in April and some changes in tax laws that went into effect this year, some of us may be in for a big surprise.

What’s New?

New for 2013 taxpayers is the 3.8% surcharge tax on investment income. In order to avoid this tax, you may be tempted to look for investments that pay little or no income (relying on growth in value rather than dividend or interest payments). Although tax savings sound like a good thing, the impact on your portfolio by selecting investments that avoid dividends to accomplish this could offset any tax savings you may achieve and maybe even more. It is important not to lose sight of your overall performance and to take into account both taxes and other fees.

Tax Efficient Investing

Municipal Bonds

So what can you do to keep those costs down? From a tax perspective, you have a few options. First, if you are in a higher tax bracket you should consider investing in municipal bonds. Interest on these bonds will not be taxed for federal purposes, only on state income. In some states the bonds may be tax free for both state and federal depending on the type of bond; these bonds are often referred to as double exempt bonds. The rules around what bonds qualify as double exempt vary by state. If you invest in bond mutual funds, you will receive information after year-end letting you know the taxability of the bonds for your state.

This tax-free treatment of municipal bonds does come at a price. These bonds will typically pay a lower interest rate than corporate bonds. Generally, you should be in a tax bracket of at least 28% in order to see a tax savings that offsets the lower interest rate received.

Tax-Managed Mutual Funds

When investing in stocks, keep in mind there are mutual funds out there that are tax-managed. This means that the fund manager will take into account the impact on taxes when managing clients’ portfolios. Instead of merely focusing on total return, the fund will be conscious of the after-tax return achieved. For example, if there is a stock they are considering selling but it has been held for just under a year, they may wait until they hit the one-year mark. This ensures that the gain on the transaction is considered long-term for tax purposes. Gains that are classified as long-term will be taxed at a lower rate. This is just one example of how fund managers can improve the after tax performance in tax-managed funds.

Clearly there is a balance between good portfolio management and the impact on taxes. The fund manager will take that into account in tax-managed funds. There are many people out there that believe they have great strategies for making money with stocks. Often times once you take into account all the costs involved in the strategy, the returns are not materially higher and may even be lower.

Work with Your Advisors

Different people have very different views around taxes. Some will do anything to reduce their taxes, while others are less concerned about the impact or don’t fully understand how their investment decisions affect them. Municipal bonds or tax-managed stock funds are not for everyone. It is best to work with your advisors to determine what makes the most sense for you. Your circumstances may change from year to year, so while your investment choices may not always be set in stone, they should be reviewed regularly. Having your investment professional and tax advisor work together can save you a lot of time and money in the long run.

These are only a couple of examples of how you can manage taxes with your investments. There are other strategies such as reducing the turnover in your portfolio to cut down on capital gains or taking advantage of losses in your portfolio using a technique called tax loss harvesting.


Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Julie Nichols

CPA, PFS | Principal, Chief Financial Officer

Julie Nichols, CPA, PFS, is a Principal and the Chief Financial Officer for Wipfli Financial Advisors, based in Milwaukee, WI. In her advisory work, Julie specializes in financial planning, tax compliance and tax planning for individuals, families and business owners.

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Tax-Efficient Investing

time to read: 3 min