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Tax

A field guide to taxes for affluent investors

ByLynnley Browning
February 27, 2022 12:35 PM
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Using the Internal Revenue Code to minimize tax bills is critical for investors who want to cut their tax drag, or the amount of profits they lose to capital gains and ordinary taxes. The sometimes-massive changes proposed in shifting versions of the Biden administration's Build Back Better tax-and-spending agenda are on hold — for now. Meanwhile, here's nine key things that wealthy investors, their financial advisors and their accountants need to know.

Roth conversions are dead: Long live Roth conversions

Regular Roth conversions involve an investor switching a traditional IRA to a tax-free Roth by paying taxes on the gains up front and then letting the pot grow tax-free. Backdoor conversions are a way for wealthy people to sidestep the income limits for direct contributions to a Roth. Stalled legislation would ban the backdoor move but still permit regular conversions, though higher earners would be locked out of them come 2032 if Build Back Better, now back burnered, eventually passes. Advisors say that means that it's still worthwhile to do a conversion.

Donating stock instead of cash is more profitable to the giver

Donating stock to charity instead of cash gives an investor more tax bang for the buck. The reason: A donor can write off on their federal income tax return the full fair market value of the donated securities, not just what they paid.

It's not difficult to act like a hedge fund to minimize taxes on appreciated stock

Combining short selling with long-term investments throws off losses that can blunt the taxes on gains. Hedge funds do it; affluent investors can, too. Here’s how.

How to have your (trust) cake and eat it, too

A spousal lifetime access trust, or SLAT, has a major benefit for high net worth couples: the ability to whisk assets out of their taxable estates while still benefiting from them during retirement. Here’s how it works.


Known as founder's stock, qualified small business stock is a huge tax gift

Qualified small business stock presents a giant tax benefit for founders and investors in start-ups. It lets a shareholder rake in $10 million or 10 times their original investment, whichever is bigger — those are the three key words — completely free of capital gains tax. Still, even smart investors sometimes miss the boat. The stalled Build Back Better legislation would slash the perks of QSBS, but there’s a potential workaround.

There's a right way and a wrong way to lend money to a family member

Loaning money to a family member? Myriad things can go wrong, as this Bank of America board director is finding out. It’s a cautionary tale of what to do and what not to do.


How to deal with the IRS this tax filing season

We’ve all heard the horror stories of the IRS’s backlogs. Clients with business losses face a particular jam. Here’s what they should expect and do.


Bitcoin losses have a silver lining

Many cryptocurrency investors are getting a rude surprise after selling at big losses during the recent market turmoil. The silver lining: the 30-day wash sale rule doesn’t apply to them. Unlike stocks and bonds, cryptocurrencies aren’t subject to federal rules that prevent investors from claiming deductions if they sell an asset at a loss and then buy an identical or similar asset within 30 days.

About that canine adage and taxes

It’s one of the oldest sayings on Wall Street: Don’t let the tax tail wag the investment dog. But it’s not always good advice, making it a tax tale. Minimizing the tax drag on a retirement portfolio, or the percentage of gains lost to money paid to the IRS, is becoming a new gold standard. Here’s why.
Lynnley Browning
Managing Editor, Financial Planning
Tax Investment strategies Investment returns Politics and policy Roth IRAs
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