The theme this week on the Retirement Quick Tips Podcast is: Analyze Your Tax Return Like A CPA.

Today, I’m talking about reviewing your tax return to understand your capital gains and losses. Ideally, you would have an investment portfolio that is as tax-efficient as possible. That’s not always the case, but having a tax efficient asset location strategy (in other words having the right types of investments in the right accounts) can add up to .75% of additional annual returns. Over time, this adds up big time! 

Take a look at your schedule B and schedule D on your tax return. There you’ll find taxable interest, qualified dividends, ordinary dividends, and capital gains and losses. 

I want to keep it simple here and focus on capital gains, because I think it’s the biggest opportunity for most people, at least in my experience, to be more tax efficient. 

We want to avoid paying more tax than is necessary, and with capital gains, it tends to be something we have a bit more control over from year to year. First of all, wherever possible, you want to avoid having mutual funds (especially stock mutual funds) in taxable accounts. These can generate large and unpredictable capital gains that you don’t have much control over. So if you’re going to own mutual funds, in many cases, but not always it makes more sense to hold mutual funds in IRA or Roth IRA accounts. 

Another red flag when it comes to capital gains is a lot of trading and portfolio turnover. This is especially true when I see short-term gains and losses, meaning that the person held the investment for less than a year. Short-term gains are taxed at higher rates, and having any of these at all is problematic.

If you are a DIY investor, you’ll need to be careful about and closely monitor your accumulated or realized gains as the year goes on. You should also be reviewing your portfolio right now and again near the end of the year for losses that can offset gains. 

The great news about downturns in the stock market that we’re experiencing right now is that it allows you the opportunity to reset some of the tax efficiencies that might exist in your portfolio and move around some of your holdings to improve your asset location efficiency that I mentioned earlier is so important for your long-term portfolio returns. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast. 

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