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Forbes
4 days ago
- Business
- Forbes
The Best Brokers For Saving On Capital Gains Taxes
Y ou make money in the market but tell the IRS you're losing money. Yes, this works—for a while . Direct indexing with loss harvesting looks like a bonanza, for both providers and customers. Is it? Short answer: Yes, but. Yes, you can do nicely with this scheme, more than covering the fees charged. The two buts: (1) Before getting in, think about what's going to happen on the way out. Below I will present a cautionary tale about the resulting mess. (2) Take any vendor's projection of tax savings with a grain of salt. Providers evidently see gold here. In recent years Vanguard, BlackRock, JP Morgan Chase and Morgan, Stanley have bought their way into the business. Wealthfront, a Palo Alto, California robo-adviser, has made a great success democratizing automated loss harvesting and aims to go public in the near future. Frec, a newer San Francisco firm and something of a Wealthfront knock-off, has shaken up the business with an insanely low-cost offering. Direct indexing means owning the S&P 500 or another index not via a fund but via individual stock positions. Instead of putting $100,000 into the Vanguard S&P 500 exchange-traded fund you buy 42.4 shares of Nvidia, 13.7 shares of Microsoft, 0.33 shares of Westinghouse Air Brake Technologies and so on. Or rather, a computer does the buying. Periodically the computer plucks out losers to sell for a capital loss, replacing them temporarily with substitute stocks that behave similarly (Merck for Pfizer, perhaps). After 30 days have passed, the original position can be restored without creating a loss-killing wash sale. You sit on the winners for as long as you can. We are, of course, talking about money in taxable accounts. There is no point to direct indexing inside an IRA or 401(k). A direct indexing account typically has between 200 and 400 stocks. You don't need more than that to do a decent job of tracking an index with 500 stocks in it. Parametric Portfolio Associates was a pioneer in this business, originally offering the tax dodge to wealthy clients paying for custom portfolio management. Its direct-indexing skills (and the large footprint of Morgan Stanley, which picked up the company when it acquired Eaton Vance) explain Parametric's $400 billion of assets under management. The prevalence of fractional shares and the automation of financial advice mean that little people can now get in on the action, with as little $5,000. What kind of capital losses do you get? That will depend on the direction and the volatility of the market. Over a decade, Wealthfront reports, capital losses have averaged 2.6% to 3.3% per year for its clients, but there is a great deal of year-to-year variation. People who put money in at the beginning of 2022 got a gusher of losses in the ensuing crash, but then they would have been better off waiting for a year and doing without the tax goodie. Remember that your aim with loss harvesting is not to have losses. It's to have gains but report losses. Suppose you have a plump capital loss to put onto your tax return. How much good does that do you? This is a function of your tax bracket and your other investing activity. Capital losses can absorb any amount of capital gains and, beyond that, can be written off against up to $3,000 a year of ordinary income like salaries. Unused losses can be carried forward indefinitely but expire with the taxpayer's death. It is reasonable to expect that the tax benefits will, in the early years of a direct indexing account, more than pay for the fees, which are usually in the range of 0.1% to 0.4% a year. But at some point, perhaps after five years of a mostly bullish market, or later if stocks go sideways, you will have nothing but gain positions. Note that someone who bought in 2015 would not have derived much tax benefit from the crash of 2022 because even at its low point that year the market was twice as high as in 2015. This matter of loss exhaustion brings me to the first caveat about fancified indexing. What are you planning to do when it's time to move on? To illustrate, I will cite the case of a Forbes reader that I will identify as Mr. X. X signed up for a separately managed account with a financial advisor who was using direct-indexing software. Recently, with most of the potential losses captured, he quit the advisor and deposited the stock at a discount broker. He asked me: Now what should I do? X is sitting on an interesting pile of shares. He owns Nvidia at a $12 entry point, and should let that position ride. So, too, with gains in Taiwan Semiconductor, Broadcom and Microsoft. But he's got 140 positions that are now underwater or showing small gains. It would be nice to declutter. Some of these clunkers will be easy to dispose of. Pepsico, Nike, Pfizer—no problem. But what about PT Bank Raykat or Airports of Thailand? These American Depositary Receipts trade over the counter, which is to say, not on Nasdaq or the New York Stock Exchange. On Yahoo Finance I recently saw the airport ADR with an average daily trading volume of 993 shares and a frightful bid/ask spread of $9.52 to $12. X could sell all the cats and dogs, but would probably get hosed on the OTC shares. Apart from their sometimes larcenous bid/ask spreads, unlisted shares may not qualify for commission-free trading. Another problem: Odd lots (less than 100 shares), of which X has more than 400, are sometimes hard to trade. This junkpile cries out for all-or-none orders (you don't want a trade to turn an odd lot into an odder one). But combining that restriction with a price limit increases the chance that an order simply won't be executed. X did walk away with a fat loss carryforward, which may come in handy some day, but is likely to spend many hours cleaning up. Here's someone commenting anonymously online on direct indexing: 'I made a big mistake doing it in a Wealthfront account and when I wanted to consolidate holdings with another firm, I had to manually sell 195 securities. Stick to broad index ETFs!' I don't entirely agree with that sentiment. Direct indexing makes sense if you have plans for the end game and if you stick to large U.S. companies. I'll go this far with the Wealthfront critic: You should get your small-stock and foreign exposures via ETFs. Now let's look at the second caveat, which is to understand the value of a capital loss. Wealthfront says that, over the past decade, it has captured $3.5 billion of losses for its customers, 91% of them short-term. (These figures include earlier versions of tax-wise automated investing as well as the more recent direct indexing product.) The losses, it declares, have saved people an estimated $1 billion in taxes. Fine print: The estimate assumes that all of the short-term losses went to use, immediately, against short-term gains. This is unrealistic. Someone with a $100,000 account generating $3,000 of capital losses, and with no capital gains to report, can indeed use the $3,000 against ordinary (that is, high-taxed) income. But someone with a $1 million account generating $30,000 of capital losses is unlikely to be using all that against high-bracket income. It would require having at least $27,000 of short-term capital gains. People do not have short-term capital gains unless they engage in foolish behavior, such as investing in a hedge fund. Rational investors do, however, have long-term gains to report. They get them from employer stock, sales of homes, all-cash takeovers and unwanted capital gain distributions from mutual funds. Realistic assumptions for big-ticket investors: You will be using most of your capital losses, whether short or long, to absorb long-term gains. You may find yourself using a loss long after you harvested it. The top rate on long gains is 23.8% plus whatever your state grabs. Conclusion: Losses are valuable but not as valuable as advertised. Now here are some product reviews. Wealthfront This one is my favorite. It offers a direct-indexed S&P 500 account at a bargain-basement 0.09% annual fee, with a $5,000 minimum. Frec In a price war with Wealthfront, this outfit has the same 0.09% fee for the S&P 500 direct deal, with a $20,000 minimum. It gets a runner-up status because it's newer and smaller. It oversees $350 million to Wealthfront's $80 billion. Frec has some interesting variations on the theme, including a Sharia-compliant index portfolio at 0.35%. Fidelity Its direct-indexing product uses 250 or so stocks to mimic the Fidelity Large-Cap Index (similar but not identical to the S&P 500). The annual fee is 0.4%, with a $5,000 minimum. When the harvesting wears out you can transfer the collection of stocks to a no-fee brokerage account. Forty basis points is a lot. But using this service could make sense if you have other money at Fidelity, which oversees (in custody or management) $15 trillion. It has a powerful brokerage platform and the oldest and biggest broker-affiliated donor-advised charity fund. Exit plan: Offload your long-term winners onto the charity, which will take them, fractional shares included, with a few mouse clicks. Schwab Charles Schwab has a 0.4% direct indexing product (minimum, $100,000) and a charity fund similar to Fidelity's. Vanguard This firm invented retail-level indexing and is known for its low costs. Four years ago it spent an undisclosed sum of money (your money, if you are a Vanguard customer; it's a mutual corporation) to acquire direct indexer Just Invest Systems. So, what's on offer? I can't find an answer on the Vanguard website, which has only a vague description of direct indexing aimed at financial advisors. The company did not respond to a press inquiry. A few weeks ago former shareholders of Just Invest sued Vanguard, claiming they were double-crossed on a performance payout. Could be a while before we see a competitive offering from the indexing king. More from Forbes Forbes Is Your Broker Gouging You? Use This Guide To The Best Buys In Money Markets By William Baldwin Forbes How To Boost Your Cash Yield At Fidelity, Vanguard, Chase And Schwab By William Baldwin Forbes How To Use Gold And Other Hard Assets To Hedge Against Inflation By William Baldwin Forbes Inside Private Equity's $29 Trillion Retirement Savings Grab By Hank Tucker
New York Times
18-07-2025
- Business
- New York Times
Hot Dogs for Insomnia? A Kennedy Aide's Start-Up Can Get You a Tax Break.
An insomnia diagnosis yielded a recommendation for a five-pack of beef hot dogs. An acne diagnosis brought a medical note proposing that the condition be treated with classes at a mixed-martial-arts gym. Decades-old arm fractures earned a nurse practitioner's order to buy a kettlebell from Nike. And because a medical provider had blessed the purchases, they came with the promise of a major perk: People could buy them using money not subject to federal income taxes. That is the daring new world of American medical spending that Truemed, a three-year-old wellness company, is trying to build. Its co-founder Calley Means has rocketed to the upper reaches of power in the health care system as the right hand to Health Secretary Robert F. Kennedy Jr. Operating in a little-known corner of the nearly $5 trillion health care system, Truemed helps supply people with letters attesting to their medical need for products like red-light masks, Peloton bikes and $9,000 saunas. With those letters, the company tells people, they can use health savings or flexible spending accounts to buy the items. The accounts allow people to set aside a limited portion of their income, without paying federal income tax, for qualified medical expenses. Buying this way can save some people thousands of dollars. But tactics like Truemed's challenge core principles of the Internal Revenue Service guidelines around medical expenses, former regulators said in interviews. In justifying certain purchases, the company has facilitated letters that misapplied medical studies to patients. And Truemed enlists online medical providers who, The New York Times found, sometimes sign letters within seconds of users' requesting them — even when the letters contain incorrect or extraneous information. Want all of The Times? Subscribe.
Yahoo
14-07-2025
- Business
- Yahoo
4 tax-saving real estate strategies — and how to avoid their pitfalls
The Trump megalaw opened more pathways to tax savings on real estate investments atop the substantial ones that were already available. Adjustments and the permanent extension of the opportunity zone tax credits that enable investors to defer or reduce capital gains in certain areas added to perennial incentives and strategies around 1031 exchanges, depreciation and cash-flow investing, said Rich Arzaga, founder of Monument, Colorado-based The Real Estate Whisperer Financial Planning. In that sense, what was possibly "the biggest news for real estate was actually among the items that were talked about the least" during the push led by President Donald Trump and his Republican allies in Congress to pass the legislation by July 4, Arzaga said. "The opportunity zone benefits really phased out, so if this didn't pass, the opportunity zones would almost completely go away," he said. "They brought it back up and gave it new life." And investors may not realize that syndicates or real estate investment trusts can offer some of the tax advantages without majority ownership and management of the asset, said Rachel Richards, head of tax products at Gelt, an accounting and artificial intelligence-powered tax services firm that works with high net worth clients and business owners. "What you're looking for and how you're involved in the investment can have an impact on how those investments will be taxed," Richards said. "You are going to be heavily involved in operating and managing the investment. So it really comes down to prioritizing what tax outcome you're looking for, versus how much time you're willing to invest in the opportunity." READ MORE: 5 tax strategies that pay off in real estate and homeownership That time factor plays a large role in opportunity zone credit, which the new law will cut off at the end of next year and require governors to select new areas under tightened criteria every 10 years beginning in January 2027. Investments in rural areas in particular will get extra tax savings, while enhanced reporting requirements could give researchers and policymakers a clearer picture of the impact of opportunity zones moving forward. On the other hand, the gap between the end of the first version of opportunity zones from the Tax Cuts and Jobs Act of 2017 and the incoming rules under the One Big Beautiful Bill Act will likely reduce those investments across the board for a year or more. Over the longer term, a real estate seller who uses a 1031 exchange to buy a similar property within 45 days could use the opportunity zone credit to apply their step-up in basis for the postponement of capital gains in the transaction, Arzaga noted. More generally, an "investment policy statement" that identifies the goal and strategy, the type and location of the property they would like to buy and the amount of capital at disposal could aid investors and their representatives in the 1031 process, he said. "It can help you focus on exactly what sort of property you should be looking at," Arzaga said. "Their focus gets much more narrow, and they end up with a property that is more to their liking." He and Richards pointed out that 1031 investors should avoid a common pitfall in what can turn into a rush to find the second corresponding asset within the deadline for the exchanges to secure the deferral of taxable gains. "It's something that you really want to plan in advance," Richards said. "The closing day isn't the day to say, 'Oh, I should really do a 1031 exchange.'" READ MORE: 2 methods to avoid capital gains in a home sale The write-offs from depreciation based on the wear and tear of a real estate property asset work differently by slashing the investor's taxable income from the asset. That brings tax savings alongside some other frequently overlooked expenses among rental property owners in particular, such as building management fees, a maintenance reserve, utilities and landscaping in the complex mix of costs and income from that type of investment, Arzaga noted. Frequently, they only anticipate expenses such as the cost of a mortgage, property taxes and insurance. "Those are only three of maybe 10 types of expenses that people can expect to pay," Arzaga said. "It takes patience, and it takes being thorough, but it's not that hard." For real estate depreciation, the investor must be using the property for a business purpose rather than as their residence, Richards noted. But they can tap into some of those write-offs by joining a group of investors in a syndicate rather than through the majority ownership and all of the obligations that come with it. "Depreciation is tied to the property, but you don't need to directly own the property in order to enjoy the benefits," she said. "They just come to you in a different way than if you are a landlord yourself and owning real estate and renting that out." READ MORE: 11 tax tips on mortgages and homeownership Popular narratives about investing in real estate tend to ignore such nuances, instead emphasizing savvy buyers and sellers who "flip" properties after substantial upswings in value. That appreciation strategy ignores the fact that those profits stem from "market circumstances, and the investor has no control over that," Arzaga noted. Furthermore, most real estate investors own single-family properties or duplexes that tend to appreciate at about 3% a year, with the possibility of incurring taxes during a sale that could further hurt their earnings, he said. Instead, a strategy based on the precise calculation of returns and expenses that taps into depreciation write-offs and other tax incentives amounts to a thesis based on cash flow, also known as "passive" investing or a "core real estate" holding. That requires a more thoughtful approach — which investors prefer, once their financial advisor or tax professional explains it to them, Arzaga said. "They say, 'I'd rather have the cash flow,' but it's hard to get, and most people won't do the work that it takes to get there," he said. The realities of the day-to-day issues involved with real estate ownership comes home to many investors who "get really excited about these things, and then they go to execute and find that they're not really interested in becoming a landlord," Richards said. That explains why many experts advise clients to pursue cash flow rather than chasing appreciation. "That cash flow-positive business use can give you that guaranteed return on your investment, and then the appreciation is really the cherry on top," she said.
Yahoo
09-07-2025
- Business
- Yahoo
Commentary: Save your Trump tax cut, you'll need it later
If you're lucky enough to notice a net-income boost from the tax bill President Trump just signed, don't rush out and spend it. For Trump giveth with one hand and taketh with the other. The latest Trump "tax cuts" aren't really tax cuts in the sense that tax rates will decline from 2024 to 2025. Tax rates will mostly stay the same. But without the tax bill, tax rates would have returned to 2016 levels, and a majority of Americans would have faced higher taxes. That's because the individual income tax cuts Trump signed into law in 2017 were temporary and due to expire at the end of this year. The 2017 tax rates are now permanent, which will be a big savings for some taxpayers who would have been zapped if the rates had gone back to 2016 levels. The typical taxpayer will owe about $2,600 less per year than if the 2017 tax cuts had expired. The top 1% of earners will owe $67,000 less. Lower-income families with relatively low taxes will save only about $150 per year. There are also a few new tax cuts, such as the elimination of taxes on income from tips and overtime pay, up to certain limits. Those expire in 2029, when Trump, presumably, leaves office. The new law also increases the deductibility of state and local taxes, which will mainly benefit wealthier homeowners. If the tax-cut law makes you feel richer, don't celebrate yet. Other developments are brewing that could offset any savings from the tax cuts. Here are three factors that could raise costs for families during the next few years. Trump's trade war is far from over. Though he has delayed some tariffs more than once, others have gone into effect, pushing the average tax on some $3 billion worth of imports from 2.5% to around 15%. That's real money US importers pay upfront, then pass on to their customers, all the way to ordinary consumers buying products from retailers. Some people wonder why the Trump tariffs haven't shown up yet as higher prices, given that Trump started imposing new tariffs all the way back in February. The answer is inventories. Importers saw the tariffs coming and massively stocked up in the first quarter. Imports surged in the first quarter, then plunged in the second. That led to large inventories of pre-tariff goods and much smaller inventories of costlier post-tariff goods. Prices will rise as pre-tariff inventories run out and post-tariff products hit the Yale Budget Lab estimates that at current levels, the Trump tariffs will push inflation about 1.7 percentage points higher, costing the typical family about $2,300 per year. That's almost as much as the Trump tax cuts will supposedly save the average family. Some consumers won't notice the higher costs. Those who will notice are most likely lower-income shoppers who need the imported goods hit hardest by tariffs, including clothes, shoes, backpacks, electronics, and auto parts. By the end of the year, the higher costs imposed by the Trump tariffs should be evident at a retailer near you. The government's annual deficits are already close to $2 trillion per year, and they're going higher due to the Trump tax-cut bill, which will add at least $4 trillion to the national debt during the next decade. That's on top of $22 trillion in new borrowing that's already baked in. The Treasury is borrowing unprecedented amounts of money, and it may already be affecting markets by pushing long-term interest rates higher than they'd otherwise be. If there's so much Treasury debt coming onto the market that there aren't enough buyers, rates will have to rise to lure investors into an asset they'd otherwise pass by. Long-term Treasury rates are the peg for mortgage rates and nearly all other consumer and business borrowing rates. So, if Treasury rates are higher, all other rates are too. Homebuyers have been hoping for a break on mortgage rates, but they've stayed close to 7% for most of 2025. Higher rates can be expensive. An interest rate that's one point higher on a $420,000 loan adds $222 in higher interest costs per month, or $2,664 per year. There goes your Trump tax savings again. Read more: 'No tax on tips' is now law. What does that mean for tipped workers? There have been so many warnings about a US debt crisis during the past 20 years that it sounds like a perennial false alarm. But there are finally signs that it isn't, mainly in the bond market, where rates have been rising when ordinarily they'd be falling. Higher rates are only the first shock. Higher rates mean ever-higher interest payments on the federal debt, which is already starting to crowd out other forms of government spending. At some point, interest payments will become unsustainably high, forcing Congress to raise taxes, cut spending, and get the federal budget back on a sustainable path. This reckoning is going to hit nearly every taxpayer, through either higher taxes, benefit cuts, or both. One fix could be a federal value-added tax, similar to a national sales tax, that pushes up prices for many everyday things, similar to the Trump tariffs, except not limited to imports. There will be trims to Social Security and Medicare, higher income taxes, and higher corporate taxes. This austerity will slow the economy and maybe cause a recession, further cutting into incomes. The wealthy will pay the most, but almost everybody will pay something. Are you ready? Most Americans aren't. The nation has been on an extraordinary binge for the past 20 years, living on borrowed money like literally no other nation on earth. It now seems like an American entitlement to spend beyond your means, in perpetuity. It isn't, and those who save for a rainy day will eventually have their moment. Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman. Click here for political news related to business and money policies that will shape tomorrow's stock prices.
RNZ News
06-07-2025
- Business
- RNZ News
New card lets employees save on public transport
Extraordinary founder Steven Zinsli and Auckland Mayor Wayne Brown. Photo: Supplied Public transport fares got a hike last week - largely as a result of a government direction to regional councils to increase the private share of the service delivery costs. One company though, has been working through a way to save commuters money - by using their pre-tax income. Fintech business Extraordinary - which was formally known as HealthNow - has used a Fringe Benefit Tax ruling from the IRD to set up a platform that lets employers offer their workers the ability to pay for public transport through their pre-taxed pay. Previously FBT rules meant employer-subsidised transport came with tax penalties. Extraordinary founder Steven Zinsli joins Kathryn to explain how it works - and how much employees could save.
