How to Avoid Taxes Like the Rich and Famous
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What is the main topic discussed in this episode?
Access to affordable credit helps me pay my employees, but I don't really need it. Inflation is killing me. But who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill. See? Banks and credit unions help small businesses make payroll. This bill would cut the vital resources they need. While increasing megastore profits. They deserve it, don't they? Tell Congress, stop the Durbin Marshall money grab for corporate megastores. Paid for by the Electronic Payments Coalition.
Here's your Money Briefing for Thursday, December 12th. I'm J.R. Whelan for The Wall Street Journal. Individual investors have gained access to many things that were once only available to the heavy hitters on Wall Street, like options trading. The playing field is being leveled even more with tax-optimizing products.
What you broadly can get here is automated tax harvesting. You can get, in some cases, direct indexing. You can also get just some simple automated tax management of where you're putting each of your assets, which actually makes a big difference.
We'll talk to Wall Street Journal Hurt on the Street reporter John Sinduru after the break.
Access to affordable credit helps me pay my employees, but I don't really need it. The inflation is killing me. But who cares?
What tax advantages do wealthy investors historically use and why?
Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill. See? Banks and credit unions help small businesses make payroll. This bill would cut the vital resources they need. While increasing megastore profits. They deserve it, don't they? Tell Congress, stop the Durbin Marshall money grab for corporate megastores. Paid for by the Electronic Payments Coalition.
wealthier investors often find opportunities to pay less taxes than those in the middle class. Now, people with stock portfolios or 401k accounts can do the same. Wall Street Journal Hurt on the Street reporter John Sindru joins me.
Why do investors engage in year‑end tax loss harvesting and does it work?
John, why is this typically the time of year when investors at all levels seek out ways to reduce their income tax bill?
So we see a little bit of weirdness going on in financial markets, usually near the end of the year. Not everything has to do with tax. It also has to do with the risk budgets of asset managers and other issues. But You do see, for example, the famous Santa Claus rally, which is the observation that stocks tend to rally near the end of the year. Usually one of the theories that holds more water is that it's the reversal of people selling their losing stocks earlier to try and do what is known as tax loss harvesting, where you can offset some of the gainers with some losers. So they do this earlier. And then as we get near the end of the year, there's other people who try and buy them because they think they're cheap.
How effective is that, the tax loss harvesting?
It is relatively effective. You can offset quite a lot of your gains. So this traditionally has been a tactic that many wealthy individuals have followed, especially since the 1990s. There's a company called Parametric, which pioneered a strategy that's usually referred to as direct indexing, which means that, say, instead of owning an S&P 500 tracker in the form of a mutual fund or whatever it is. You'll just own those stocks individually. And then the advantage of that is, of course, you can dispose of the ones that have been losing money to try and offset your taxes. This is a strategy that is beneficial, particularly for people with millions of dollars in wealth. but has issues. And one of them is, well, eventually you run out of losers, right?
Because the market tends to go up. You end up with what's being called a frozen portfolio. And here's where other more complicated strategies have been developed to try to help the wealthy not so much offset the taxes they have to pay, but more defer the taxes they have to pay. Because if you can defer this for 30 years, you're compounding gains right now, right? And you also pay a smaller long-term capital gains tax than you do a short-term capital gains tax.
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:00–1:35
2
What tax advantages do wealthy investors historically use and why?
1:35–2:17
3
Why do investors engage in year‑end tax loss harvesting and does it work?
2:17–5:13
4
What is direct indexing and how does it help defer or reduce taxes?
5:13–7:33
5
What are the limitations of tax‑loss harvesting and when does a portfolio become 'frozen'?
7:33–8:27
Speakers
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