Tax Management

Investor's Alpha:  Tax Management

The fourth part of our Investor's Alpha series highlights the importance of minimizing taxes to enhance long-term returns.  Tax management is a process and not just a RonCo product that one can "set it and forget it".  The goal is to avoid taxes to keep more income from both wages and investments to enhance portfolio outcomes.  Investor's should take every advantage of every opportunity that the IRS provides to avoid, reduce, and defer the amount of taxes paid.

Tax management at its most basic level is a dynamic, optimization function.  Those fancy math words basically mean that investors should follow these 3 easy steps:

  1. Be aware of the basic tax laws
  2. How do these laws impact my income and investments?
  3. What actions can an investor take to reduce their tax burden?

The following inputs should drive a review of the portfolio to evaluate if changes should be made:

  • Change in year
  • Major new tax laws
  • Change in employment (hired, fired, retired)
  • Change in Family (kids, marriage, divorce, death)
  • Move out of state

Almost every major life even will trigger a change in a person's tax situation.  The most important part of the tax management process is to have awareness that if your life changes, your taxes will likely change as well.

Tax management is an investor controlled input into the wealth equation:

Wealth = Factors You Control + Investment Returns