The analysis below highlights the tax consequences of a 20% gain on a $1 million dollar portfolio under a range of potential tax treatments. The difference between the more and less favorable scenarios is a negligible 3% change in the overall portfolio value.
VARIOUS TAX CONSEQUENCES OF A 20% GAIN IN A $1 MILLION PORTFOLIO
Source: IRS 2021 (https://www.irs.gov/publications/p15t)
The chart above shows the outcome of an individual who is in the middle federal income tax bracket, achieves a 20% return on a million-dollar portfolio, along with the cumulative outcome of moving from the least to most impactful tax treatment. In the most favorable scenario, the gain is taxed at the long-term capital gains rate in the current tax bracket. In the least favorable scenario, the entire gain is taxed at the marginal income rate in the next higher level-tax bracket. The difference between the two is $34,000.
Despite making $200,000 from investment gains, we can get undone by the thought of having to write a big check to the government. Fortunately, for most investors, there are a handful of straightforward tax strategies that can help build long-term wealth without compromising your investment process. These strategies include taking advantage of tax-deferred accounts, accelerating or deferring distributions, and gifting. Working with an experienced advisor, accountant, or attorney can help navigate this area and tailor solutions for your unique situation without compromising your investment process.
The main point is to separate our investing strategy from tax management. Grow investments first, then manage the tax consequences. After all, an investment gain is almost always a good thing!
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IMPORTANT INFORMATION AND DISCLOSURES
The information provided here is for general informational purposes only and should not be considered an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. It should not be assumed that recommendations of AthenaInvest made herein or in the future will be profitable or will equal the past performance records of any AthenaInvest investment strategy or product. There can be no assurance that future recommendations will achieve comparable results. The author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions. AthenaInvest disclaims any responsibility to update such views. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of any AthenaInvest representative.
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