Asset Allocation For Dummies®

Chapter 14. Managing Your Taxes like a Pro

In This Chapter

• Making tax-smart decisions when you sell securities

• Getting a feel for asset location

• Knowing when to take advantage of tax losses

• Making sure that the tax tail doesn't wag the investment dog

It'd be a real shame if you did a great job creating a high-performance investment portfolio and ended up giving away a bigger-than-necessary chunk of it in income taxes. And it'd be an even bigger shame if you coughed up all those taxes for no other reason than poor planning!

Throughout the book, we give you information on the tax aspects of various investments and investment accounts, and specific advice on how to minimize the amount of income taxes you'll ultimately have to pay on your investments. In this chapter, we expand on all that good advice, give you some concrete examples, and help you develop a coordinated, coherent strategy to manage your investment-related taxes.

To do that, we look at several ways you can protect your portfolio from unnecessary and avoidable tax hits. First, we consider the income-tax implications of selling securities and tell you what you need to know to be tax-smart about the process. Then we delve into asset location, a strategy for matching the tax characteristics of your individual investments with the tax features of the investment accounts you place them in. Those are both great defensive maneuvers.

Then we tell you how to go on the offensive. We fill you in on tax-loss harvesting, which is a technique ...