Morgan Stanley
  • Wealth Management
  • Mar 15, 2023

4 Key Tax Questions for Investors to Consider

Factoring the impact of taxes into your investment decisions can help you to keep more of your hard-earned money, both now and in the future.

Building and preserving wealth may involve more than maximizing your investment returns. You can also consider your portfolio’s tax efficiency. Even small reductions in your tax costs today could have a big impact on the amount of wealth you’re able to build over time and how quickly you’re able to build it. Tax-efficient planning might also help you preserve more of your wealth for your beneficiaries, whether loved ones or charities.  

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Because tax planning and investment planning often go hand in hand, it’s important to ensure that your tax advisor and Financial Advisor are working together to help you put a strategy in place. Consider meeting with them jointly and asking these four questions to help get the conversation started: 

1. How can I manage taxes on my current income?

A good place to start is thinking about how you can minimize your taxable income. There are numerous ways to do so, but one key strategy is to save as much as you can in your tax-advantaged accounts, including a 401(k) plan and an individual retirement account (IRA). Setting aside pretax dollars in these accounts may help you reduce your taxable income today, while making progress towards your long-term goals like retiring with a sizeable nest egg.

If you’re charitably inclined, another way to reduce your taxable income is through charitable contributions:

  • Donate directly to a qualified public charity:

- For 2023, you may deduct cash contributions of up to 60% of your adjusted gross income if made to a qualified public charity, subject to certain limitations.1

- In addition, for those at least 70½ years old, you can usually make what’s known as a qualified charitable distribution (QCD) to an eligible charitable organization of up to $100,000 per year directly from your IRA, generally with no tax costs to you (since QCDs are excluded from taxable income) or the charity receiving your donation.2 Note that a deduction is not available for QCDs.

  • Donate through a donor advised fund (DAF), such as the Morgan Stanley Global Impact Funding Trust (MS GIFT). Taxpayers can donate stock, mutual funds or other eligible assets to a DAF and claim a federal income tax deduction in the year the donation is made.2 Additionally, these assets can stay invested and potentially grow, tax-free, until you recommend which charities will receive a cash donation from the fund. These features also create the possibility for donors to implement a “bunching” strategy, which may be tax-efficient if you are anticipating a large capital gain or income event (such as the sale of a home or business) in a particular year. For example, if you donate a regular amount to a given qualified public charity on an annual basis, you could instead donate multiple years of contributions to your DAF and offset the large capital gain or income increase. This could allow you to take a deduction for the full amount (subject to adjusted gross income limitations) in the year you make the donation, and then make annual grants out of the DAF to your charity of choice per your regular annual schedule.

Your tax advisor can guide you on how best to put any of these strategies in place.

If you’re charitably inclined, another way to reduce your taxable income is through charitable contributions.

2. How can I help minimize taxes on my investments?

Taxable investment accounts, like a nonretirement brokerage account, may be a good idea for some investors who are looking to hold securities for more than a year. This could allow any appreciation on those assets to be taxed at the lower, long-term capital gains rate.

If you need to tap into your investments to free up cash, your Financial Advisor can help you identify a withdrawal strategy that may help reduce taxes you may owe by using Morgan Stanley’s Intelligent Withdrawals tool. It provides your Financial Advisor with a sophisticated analysis across all your accounts to help determine not only which accounts to consider drawing from first, but also which securities within those accounts you should consider selling to help achieve tax efficiency and maintain your investment strategy.

You may also want to consider a longer-term strategy known as tax-aware asset location. This generally involves placing tax-efficient, lower-growth assets in your taxable accounts, while putting income-generating assets, such as high-dividend-paying stocks, in tax-advantaged accounts to help minimize your exposure to current taxes.

Tax-loss harvesting is another way to potentially lower your tax obligation in a taxable investment account. When selling investment securities at a loss, you get to recognize a capital loss, which you may be able to use to offset capital gains.3 If you have offset all your capital gains and still have capital losses remaining, you can apply up to $3,000 of excess capital losses to offset your ordinary income. Still have capital losses after that? If so, you can use them to offset income or capital gains in future tax years. 

3. How can I lessen the bite of taxes on my retirement savings?

Just as you consider the impact of taxes while you’re working and saving up for retirement, it’s important to be strategic about taxes once you stop working full time and start living off of your nest egg.

One such strategy is income smoothing, in which you take future taxes into account when determining how much to withdraw from your retirement accounts each year. For example, you may decide to withdraw more money than you need from certain tax-advantaged accounts, such as traditional IRAs (but not Roth IRAs), earlier than required to lower your balance when you need to start taking required minimum distributions (RMDs)4 from the accounts. The reason? Even though you’d have to pay taxes now on the withdrawals, if done correctly, you could avoid being pushed into a higher tax bracket that would result in larger payments when your RMDs kick in. Plus, you’d have more resources to spend and enjoy during the most active years of retirement. 

4. How can I preserve more of my wealth for family or charity?

Taking steps to minimize how much of your estate goes to taxes can allow you to leave a larger legacy to the people and causes you care about most. One strategy involves making financial gifts to the next generation while you’re still alive. Federal law allows you to gift up to $17,000 per person per year ($34,000 per person per couple) without owing U.S. federal gift tax. Gifts that exceed that amount will count toward your lifetime U.S. federal gift and estate tax exemption, which for 2023 is $12.92 million per person and $25.84 million per married couple.5

You may want to consider a trust, which can be a valuable tool for ensuring the financial objectives you envision are achieved. Trusts are also a tax efficient way to preserve your financial and philanthropic legacy for generations to come.

Building, protecting and passing on a legacy involves much more than investing wisely. It requires a careful analysis of your objectives, intelligent structuring of your assets and strategic planning for implementation.

Your Morgan Stanley Financial Advisor can connect you with a Trust Specialist or other estate planning resources within Morgan Stanley to help educate you on the options, and which might be the best fit for you.

Taking steps to help minimize how much of your estate goes to taxes can allow you to leave a larger legacy to the people and causes you care about most.

Bring your advisors together

If you typically work with your Financial Advisor and tax advisor separately, you may find that a closer relationship between them could uncover investment-planning opportunities that could help mitigate your tax liability.

Wondering where to start? Consider a joint meeting to discuss the interplay between your investments and tax situation. This can happen any time of the year. Be prepared to bring your investment statements and your filed tax returns—and consider using these questions to help you get the most out of the conversation.

The tax-smart techniques and strategies described above are part of Morgan Stanley Total Tax 365, which your Morgan Stanley Financial Advisor can offer to help you reduce the impact of taxes.

In addition, if you have complex tax planning needs, your Morgan Stanley Financial Advisor can connect you with an experienced tax professionals at leading U.S.-based providers across the country to help optimize  your tax strategy.

1 The 60% limitation excludes giving to private non-operating foundations.

2 Inherited IRAs are also eligible for QCDs if the applicable conditions have been met (e.g., you must be at least age 70 ½, etc.).

3 Remember that the “wash sale” rules won’t let you recognize a tax loss on a current basis if you buy the same or substantially identical securities within 30 days before or after the sale that generates the tax loss.

4 The Secure Act of 2022 increased the Required Minimum Distributions (RMD) age from 72 to 73 beginning in 2023, and to 75 beginning in 2033.

5 On Jan 1, 2026, the gift and estate tax exemption reverts to its pre-Tax Cuts and Jobs Act amount of $5 million, subject to inflation adjustments.

Disclosures:

When Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors (collectively, “Morgan Stanley”) provide “investment advice” regarding a retirement or welfare benefit plan account, an individual retirement account or a Coverdell education savings account (“Retirement Account”), Morgan Stanley is a “fiduciary” as those terms are defined under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and/or the Internal Revenue Code of 1986 (the “Code”), as applicable. When Morgan Stanley provides investment education, takes orders on an unsolicited basis or otherwise does not provide “investment advice”, Morgan Stanley will not be considered a “fiduciary” under ERISA and/or the Code. For more information regarding Morgan Stanley’s role with respect to a Retirement Account, please visit www.morganstanley.com/disclosures/dol. Tax laws are complex and subject to change. Morgan Stanley does not provide tax or legal advice. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account.

The Morgan Stanley Global Impact Funding Trust, Inc. (“MS GIFT, Inc.”) is an organization described in Section 501(c) (3) of the Internal Revenue Code of 1986, as amended. MS Global Impact Funding Trust (“MS GIFT”) is a donor-advised fund. Morgan Stanley Smith Barney LLC provides investment management services to MS GIFT. Back office administration provided by RenPSG, an unaffiliated charitable gift administrator.

While we believe that MS GIFT provides a valuable philanthropic opportunity, contributions to MS GIFT are not appropriate for everyone. Other forms of charitable giving may be more appropriate depending on a donor’s specific situation. Of critical importance to any person considering making a donation to MS GIFT is the fact that any such donation is an irrevocable contribution. Although donors will have certain rights to make recommendations to MS GIFT as described in the Donor Circular & Disclosure Statement, contributions become the legal property of MS GIFT when donated.

The Donor Circular & Disclosure Statement describes the risks, fees and expenses associated with establishing and maintaining an MS GIFT account. Read it carefully before contributing.

Morgan Stanley does not accept appointments, nor will it act as a trustee but it will provide access to trust services through an appropriate third-party corporate trustee.

Trusts are not necessarily appropriate for all clients. There are risks and considerations which may outweigh any potential benefits. Establishing a trust will incur fees and expenses which may be substantial. Trusts often incur ongoing administrative fees and expenses such as the services of a corporate trustee or tax professional.

The trust services referenced herein are provided by the third parties who are not affiliated with Morgan Stanley. Neither Morgan Stanley nor its affiliates are the provider of such trust services and will not have any input or responsibility concerning a client’s eligibility for, or the terms and conditions associated with, these trust services. Neither Morgan Stanley nor its affiliates shall be responsible for content of any advice or services provided by the unaffiliated third parties. Morgan Stanley or its affiliates may participate in transactions on a basis separate from the referral of clients to these third parties and may receive compensation in connection with referrals made to them.

Although the statements of fact and data in this material have been obtained from, and are based upon, sources that the firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. This material is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

© 2023 Morgan Stanley Smith Barney LLC, Member SIPC.      

CRC#5487368   (03/2023)

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