Tax Considerations for Investment Management
Tax is a drag - manage it deliberately
Know marginal versus effective rates, ordinary income versus long-term capital gains and qualified dividends (preferential rates require a holding period longer than one year for securities), and the 3.8% net investment income tax above MAGI thresholds ($200,000 single / $250,000 joint). Capital losses first offset gains, then up to $3,000 of ordinary income per year, with the remainder carried forward. The wash-sale rule disallows a loss if substantially identical securities are bought within 30 days before or after the sale - including inside an IRA.
Asset location complements asset allocation: place tax-inefficient income producers (taxable bonds, REITs) in tax-deferred accounts and tax-efficient equities in taxable accounts, where losses can be harvested. Remember the basis step-up at death for capital assets (not IRAs), municipal bond tax treatment, and charitable tools such as donor-advised funds and charitable remainder trusts.
Traps. Wash sales across accounts; assuming all dividends are qualified; forgetting state tax on out-of-state munis; treating a Roth conversion as tax-free; and ignoring that a harvested loss lowers basis tomorrow.
Rule of thumb. Taxable-equivalent yield = tax-exempt yield ÷ (1 − marginal rate). Compare investments on an after-tax basis, and always ask which account will hold the position before recommending it.