How to Minimize Your Tax Bite

Use these strategies to boost your after-tax returns.

- NELLIE S. HUANG

WE ALL KNOW WHAT THEY SAY about the certainty of taxes. And this year, it’s a good bet that some taxes on investment income will rise— the biggest uncertainty is by how much. That makes now a good time to review some tax-wise investing strategies.

President Biden’s American Families Plan proposes to nearly double the long-term capital gains tax for the wealthiest taxpayers, from 20% to 39.6%. Add the 3.8% net investment income tax that certain high-earning investors must pay, and the top capital gains rate would rise to 43.4%. The plan is merely a proposal, of course; the final rate may land closer to 24% to 28%, say some experts.

Smart investors won’t make major portfolio changes right away. “I would not react to proposals,” says Joel Dickson, Vanguard’s head of Enterprise Advice Methodology. “Trying to predict what new taxes will look like is a fool’s errand,” he says. What’s more, the American Families Plan proposal would only affect taxpayers with annual income of $1 million or more, impacting “a small group of investors in a very small way,” says Dickson—and only in their taxable accounts, where capital gains taxes apply.

Nevertheless, a tweak to your portfolio here and there could boost your after-tax returns, no matter how much money you earn. And what you save in taxes can grow and compound longer. “Tax management matters a lot,” says Bradley Clark, a certified financial planner in Andover, Mass. “It is more important for people in the highest tax brackets, but it is important for everyone.”