Financial Education

Taxes are faced by investors worldwide, but the various tax codes can be complex and confusing. Specific tax strategies are probably best executed by a tax attorney, but there are general considerations of which investors and investment advisers should be aware.

Common types of taxes include income taxes, taxes on the gains or profits from investments, property taxes and wealth transfer taxes. Each can play a role in investment planning.  Specific strategies include tax deferral, tax avoidance and tax reduction.

Tax deferral refers to delaying the time at which income is taxed. Periodic payments reduce the compounding effects of return, so the longer tax payment can be deferred the greater the terminal wealth will be. Longer holding periods can defer gains taxes. Loss harvesting strategies can also be used to mitigate gains.

Tax avoidance refers to legal strategies to avoid taxes (as opposed to illegal tax evasion.)  Typically such strategies come at the cost of lower returns (tax exempt bonds), lower liquidity (tax deferred accounts) or less control over the investments (trusts).

Tax reduction strategies consider differences in rates between different taxes (such as income versus gains) and seeks to maximize the most efficient type of return (i.e. favor gains over dividends.) Tax reduction strategies can also incorporate deferral and loss harvesting strategies.

For more information, see all articles on: Active Management, Asset Allocation, FInancial Planning, Investment Returns, Portfolio Management

See also:

The Role of Strategic Asset Allocation in Portfolio Management

Elements of an Investment Policy Statement

Investment Risk Management Process

Strategy and Due Diligence for Private Equity Investments

Fundamental Law of Active Management