Savvy Tax Planning


Tax alpha is the outperformance that an investor can achieve by taking advantage of available tax savings strategies. Obviously, the bigger the tax liability, the more tax savings can be realized. Utilizing the statutory tax shelters provided within the Internal Revenue Code is the underlying code of tax alpha.

There are now seven different ordinary income tax brackets and three different capital gains tax brackets. If you combine these tax brackets with the new net investment income tax, there are even more possible tax brackets. Many high-income taxpayers are therefore subject to a 40.8% tax rate on ordinary investment income and a 23.8% tax rate on long-term capital gains.

The increased value created in an investment portfolio by using the tax-saving strategies described below is referred to as tax alpha. Put another way, it is your after-tax excess return (after-tax alpha) minus your pre-tax excess return (pre-tax alpha) based on the appropriate benchmarks.

Generally, an index issued as the appropriate benchmark (e.g., the Russell 1000 for U.S. large cap stocks). Research indicates that many portfolios don’t consistently beat their benchmarks on a pre-tax basis, often producing negative alpha on an after-tax basis.  That is why creating tax alpha is important. If pre-tax alpha is positive, tax alpha planning can increase the excess.

Taxes are the most important drag on investment return, even greater than inflation, transaction costs or management fees. Studies performed ten to fifteen years ago showed that taxes reduced returns by an average of one to three percentage points.

Recent tax increases should increase these percentages significantly, making it more important than ever to manage tax drag and create positive Tax Alpha for clients. Adding tax alpha strategies reduces the effective tax rate on investment returns.

The strength of tax alpha lies in understanding and utilizing tax shelters built into the Internal Revenue Code. It involves developing various specific tax strategies in the following areas:

  • Traditional IRA and Roth IRA Planning 
  • Qualified Retirement Plan Distributions
  • Capital Gains and Losses
  • Bond Income
  • Dividend Income
  • Stock Option Transactions
  • Charitable Planning
  • Specialized Investment Transactions
  • Tactical Tax Planning
  • Trusts and Estates


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