Time is running out for a set of money-saving provisions in the tax code, and now is a good time to get your portfolio in order and minimize taxes, according to Bank of America. The Tax Cuts and Jobs Act (TCJA), which took effect in early 2018, overhauled the federal tax code. It nearly doubled the standard deduction, adjusted individual income tax brackets, lowered most rates and implemented a $10,000 cap on state and local tax deductions. Unless Congress acts, the slate of provisions in the law will expire at the end of 2025, which could upset taxpayers. “The expiration of the TCJA could mark the largest tax increase in history, costing $4.6 [trillion],” wrote Jared Woodard, investment and ETF strategist at Bank of America, noting that the combined tax burden on US households will increase by $2 trillion over the next five years. “By some estimates, the top five households could pay 2-6% more of their income in taxes,” he added. With that background, Woodard offered investors several steps to help prepare their portfolios for a higher tax situation. Stick to tax-free ETFs Generally, exchange-traded funds are more efficient than their tax counterparts. mutual funds tend to be highly profitable – that is, buying and selling the underlying securities – and by law must distribute large profits Investors in mutual funds do not have to sell shares in order to face large tax benefits : A fund manager who sells certain assets to take a profit or to exit investors who leave, for example, they receive a large profit and need to be distributed to shareholders “For the same investment, taxable events mean that mutual funds cost investors 1.3%. per year compared to just 0.4% for ETFs,” Woodward said. He added that an investor who plugged $100,000 into an S&P 500 ETF in October 2013 and carried forward today would have gained $359,000. That compares to a balance of $316,000 if it was an S&P 500 mutual fund. Consider dividend-paying stocks vs. bonds. Stocks that earn dividend-quality dividends may be tax-efficient for investors who keep them in a brokerage account. 20%, depending on the investor’s taxable income. Interest income from bonds, on the other hand, is generally taxed at the same rate as ordinary income – which can be as high as 37%. Note that this treatment is different from municipal bonds, which are tax-free on a state basis are exempt from federal taxes if the investor resides in the issuing state.At that time, the income from Treasurys is subject to federal income tax, but not subject to state and local taxes. Investors should remember that tax considerations are one of the factors that must be balanced in their portfolios. That is, the tax-friendly aspect of dividends shouldn’t encourage you to stockpile stocks if your risk appetite and goals suggest bonds might be a better choice. Look for tax-free opportunities for your assets Look at your portfolio and see if there are any tax-advantaged opportunities, says Woodard. “A lot of ETFs are taking advantage [qualified dividend income] and repatriation for tax efficient distribution,” he wrote. For income-seeking investors, the strategist called high-yield municipal bonds, “offering a tax-adjusted yield base of 6-7%, 350 bps above the US aggregate bond index. ” Funds he looks at include the SPDR Nuveen Bloomberg High Yield Municipal Bond ETF (HYMB), which has an expense ratio of 0.35% and a 30-day SEC yield of 4.32%. The VanEck High Yield Muni ETF (HYD) has an expense ratio of 0.32% and a yield of 30-day SEC yield of 4.16%. For ETF plays, the strategist highlighted the Global X MLP & Energy Infrastructure ETF (MLPX) and the Global X MLP ETF (MLPA). Both offerings have expense ratios of 0.45%. about 34%, while MLPA has a gross margin of over 14%.
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