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Sawtooth’s Solution Center:

Investment Tax Management

Taxes Reduce Net Investment Returns

Forty-one states impose a tax on capital gains. Those rates averaged 6.37% for the 2020 tax year. But for investors residing in California, the maximum state capital gain rate was 13.30%. When these state taxes are combined with Federal taxes, the combined tax burden on investment returns can exceed 50%. Fortunately, there are resources available to investment advisors to mitigate this drag on investment returns. Sawtooth Solutions can employ a number of different tax management techniques as a value-added service that can reduce or defer this tax burden.

Tax Loss Harvesting

Tax-loss harvesting has long been recognized as a way to increase after-tax returns in a portfolio. Advisors have traditionally examined gains recognized through the end of the tax year as part of year-end tax planning. Next, they look for unrealized losses that can be realized or harvested in offsetting transactions. Unfortunately, the optimal time to look for losses is often not at the end of the tax year. As the market cycles up and down throughout the year, there can be multiple loss harvesting opportunities.

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Wash Sale Monitoring and Avoidance

While loss harvesting is simple as a concept, it can be challenging to implement successfully. Most advisors know that once a trade is placed to realize a tax loss, that the same security (or any substantially equivalent security) cannot be purchased for thirty days. These trades are called wash sales, and the losses realized are not available for tax purposes.

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Holding Period Monitoring and Management

Client positions may be comprised of securities with many different holding periods. Routine rebalancing can result in multiple tax lots of the same security. Sawtooth monitors each tax lot and trade to determine if the net after-tax trade results can be improved by delaying sales to achieve a more favorable tax treatment.

Tax Lot Optimization

Ongoing trading in a client’s portfolio can create adverse tax consequences. Whether the trade is the result of a manager trimming a position or the raising of cash for a client’s income needs, selecting and trading the optimal tax lot can mean the difference between realizing a short or long-term capital gain – or even a tax loss. Sawtooth is ideally positioned to provide this oversight because we are responsible for executing all manager trade requests as well as performing route portfolio administration such as re-balancing and cash management.

Tax Efficient Transitions

Tax-efficient portfolio management often begins before the first trade. Frequently accounts are funded with low-cost basis securities. And unless the client is willing to realize all their embedded capital gains, some or all of these holdings will need to be retained.

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Gain/Loss Matching

Clients frequently want to establish a tax budget. Whether as part of a portfolio transition strategy or routine portfolio management, clients use tax budgeting to eliminate unexpected year-end tax liabilities. Fulfilling these requests can be difficult as gains are often realized due to routine manager trades or re-balancing. Sawtooth can utilize ongoing gain/loss matching to reduce the net realized gains from these trades while honoring the client’s tax mandate.

What’s the Next Step?

Sawtooth Solutions employs a consultative process when onboarding new advisors to the platform. We will be happy to work with you in designing solutions appropriate for your practice and your clients. In addition, a quick demonstration of our Sawtooth Proposal and Research Center (SPARC) will show you how easy it is to exceed your clients’ expectations with unified managed accounts (UMAs). To set up a meeting, click here:

This information is intended for general informational purposes only; it is not investment advice. The material on this website does not consider the specific investment objectives, financial situation, needs or special circumstances of any particular person. This information does not represent the suitability of any strategy, financial product, security, or other instrument. Past performance is not a guarantee of future performance.

Sawtooth Solutions, LLC (“Sawtooth”) is an investment adviser registered with the U.S. Securities and Exchange Commission. The information on this website is for informational purposes only and is intended as an overview of the services offered by Sawtooth to financial advisors. Nothing contained on this website is a solicitation for investment. Any individual investor seeking more information should consult with their financial advisor.

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