Paying Taxes on Investments: Don’t Let Taxes Secretly Drain Your Legacy

What would you say if I were to tell you that the investment statement you looked at last quarter was wrong?

The reality is every investment statement you have ever looked at projects an illusion, an illusion that we live in a world free of taxes. However, we don’t live in a world free of taxes. We live in a somewhat opposing reality; we live in a progressive tax world. The more you make, the higher tax rate you pay on each additional dollar. This is true for your earned income and the capital gains that are generated from your investments.

Paying Taxes on Investments graphicAs shown below, not only will high income earners pay a higher federal capital gains tax rate, but if you have adjusted gross income (AGI) greater than $250,000 (MFJ) or $200,000 (S) you also pay what is sometimes dubbed the “wealth tax.” An additional 3.8% on the lesser of your net investment income or your AGI over identified thresholds.

Federal Capital Gain Taxes

<25% MTB*
25% – 35% MTB
25% – 35% MTB
Top 39.6% MTB
Plus Any State & Local Taxes
Capital Gains Tax
Net Investment Income Tax (If Applicable)
AGI < $250K MFJ, $200K S
AGI > $250K MFJ, $200K S

*Marginal Tax Bracket

For some, this creates a greater need to monitor income, capital gains and, subsequently, your exposure to taxes that eat away at your net returns. For example, you may find your portfolio is being actively traded and the realization of ongoing gains is coming at an “additional tax cost” that isn’t best suited for your situation.

Maybe you are fortunate enough to consider leaving assets to your children or maybe even making significant donations to charities you are passionate about.  In this situation, exposing your portfolio to ongoing realized gains from sales or mutual fund distributions may be unwise.

It may be that an approach that minimizes realized gains today and creates long-term unrealized gains makes more sense. In the future, unrealized gains (that have never been taxed or at least taxed minimally) can forgo taxation at the federal level when they are gifted to charity or at your death when they receive a step-up in basis. This can create a vast advantage, especially given that in some cases 23.8% of your gains would be directed to cover federal taxes.

Ultimately, neither investment statements nor your tax returns paint the whole picture. There is a much bigger picture that should be incorporated into how your portfolio is constructed. We believe understanding this holistically through financial planning provides the best opportunity for creating an investment strategy that is best suited and best accomplishes your goals.

If your advisor is overlooking the effect these taxes have on your portfolio, CLICK HERE and speak with a fiduciary advisor that focuses on maximizing your portfolio’s impact, not just its theoretical value.

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Date Published: October 18, 2016

Author: Chad R. McPherson

Phone: (812) 602-5980


The information in this material is only as current as the date indicated, and may be superseded by subsequent market events or for other reasons. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements. The information does not attempt to examine all the facts and circumstances that may be relevant to an individual’s financial needs. Payne Wealth Partners, Inc. is not soliciting any action based on these statements.

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Keystone Financial Consulting
601 N Cross Pointe Blvd
Evansville, IN 47715
Phone: 812-477-6221
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