Year-Round Tax Management Of Your Portfolio

As much as I would love to discuss the recent outperformance of value investing, we’ll have to save that for another day. As year-end nears, let’s take a look at the tax management actions that positively affected many of our clients’ portfolios in 2020. Claris and our partners, including Dimensional Fund Advisors (DFA), work hard to ensure our clients receive the best risk-adjusted, after-tax returns possible.

Claris Strategies

Claris works with clients on a variety of tax-advantageous strategies throughout the year, including tax loss harvesting and dividend and capital gain distribution avoidance.

Tax Loss Harvesting

Tax-loss harvesting is a strategy we use to help our clients minimize any taxes they may owe on capital gains or regular income. This involves selling an investment that has lost value (in a taxable account), and immediately replacing it with a similar investment so we are not out of the market. These capital losses can be used in the current tax year or rolled to future tax years until they are needed to offset capital gains. As many of you recall, we saw one of the steepest, fastest declines in market history from late February to late March. Toward the end of March, we conducted tax-loss harvesting for all of our clients where the opportunity existed. We took advantage of market conditions and managed to place a lot of these trades, along with rebalancing trades, very near market lows.

Dividend and Capital Gain Distribution Avoidance

The process of temporarily divesting of investments to avoid dividend and capital gain distributions, particularly in early and mid-December when the payouts tend to be the highest. We had almost nothing to do in this regard this year because our partner, Dimensional Fund Advisors, did an absolutely incredible job of limiting capital gain distributions. In fact, most of the equity funds we use had NO capital gain distributions this December.  See below on how they are able to do this. By the way, if you’re wondering how common this is, here’s an exercise for you: if you hold mutual fund investments outside of Claris, take a look at the dividend and capital gain distributions this month. Spoiler alert, it’s not very common.

DFA Strategies

DFA approaches the tax management of their mutual funds through two main areas: managing income and managing capital gains. And it works! Analysis shows a majority of their funds are just as tax-efficient as ETF counterparts. As a partner of DFA, Claris clients reap the benefits of the strategies implemented by DFA.

Managing Income

The portfolio managers at DFA are able to minimize the impact of dividend income in a couple of primary ways. The first is by holding a security for more than 60 days during the 121-day QDI holding period to ensure a dividend is qualified, thus avoiding ordinary income tax rates. In their international portfolios, they pay very close attention to the geographic source of dividends due to the difference in how treaty vs. non-treaty country dividends are treated for tax purposes.

Managing Capital Gains

DFA is able to delay the realization of short-term capital gains through flexible implementation and low portfolio turnover design along with utilizing a tax-advantaged lot selection methodology. On the long-term capital gains side of things, they again are able to delay the realization of capital gains, using cash flow for rebalancing along with utilizing in-kind redemptions.

Our work as wealth advisors is a holistic process that dives into the many facets of effective wealth management. To learn more about year-round tax planning for your portfolio or our investment methodology, contact a Claris advisor.

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