Michael O. AdairManaging Director, Senior Investment Consultant | 2018

Step 3: Tax Budget Management

City National Rochdale’s portfolio managers take active steps toward managing to the client’s tax budget and finding efficiencies where possible.

City National Rochdale’s portfolio managers take active steps toward managing to the client’s tax budget and finding efficiencies where possible. Below are a few examples.

LONG-TERM CAPITAL GAINS
Short-term capital gains are taxed at the investor’s marginal tax bracket, just like their income, while long-term capital gains are taxed at a lower rate. For that reason, we make an effort to own securities for at least one year so they qualify as long-term capital gains.

REALIZING LOSSES
Toward the end of the calendar year, City National Rochdale portfolio managers look through a client’s portfolio to locate stocks or bonds that have gone down since purchase. These assets can then be sold. After 30 days, they can be repurchased. This allows us to realize a loss for tax purposes. Occasionally, a portfolio manager may purchase a replacement security to hold in the place of the sold position during the 30 days. This replacement may be an ETF, an index fund, or another stock or bond with similar characteristics. We are mindful that an investor can only realize so much in tax losses per year on their tax return. This is considered part of the “active tax management” concept that we embrace at City National Rochdale.

OFFSETTING GAINS WITH LOSSES
After recognizing how much an investor has realized in gains for the year, the portfolio manager goes through the portfolio and sells investments that have losses—as many as possible. This helps offset the gains and minimize the tax bill.

REALIZING GAINS
Since investors can only deduct a certain amount of losses each year, some clients who have accumulated losses from prior tax years may ask their portfolio managers to realize as many gains as possible, which can be used to utilize their realized losses. We typically see this in periods of growth which follow recessions (where losses are generally realized).

TAX LOT MANAGEMENT
A tax lot is a record of an opening transaction in a client’s portfolio, for example, a single purchase of a stock. An example of a tax lot is: A client purchases 100 shares of XYZ stock on two different occasions. Each purchase is its own tax lot:
1/1/2015 Purchase 100 shares of XYZ for 25 per share.
1/1/2016 Purchase 100 shares of XYZ for 35 per share.
On 2/1/2016, if XYZ stock is trading for 40, tax lot one has a long-term gain of 15 per share and tax lot two has a short term gain of 5 per share.
One can have multiple tax lots within a security’s overall position. The portfolio manager can select specific tax lots to use as cost basis to help minimize a client’s taxes. Selling highest cost positions first (which can be tracked by tax lot), attempting to avoid short-term gains (which are taxed less favorably and held the least amount of time), and avoiding high turnover of the portfolio (which can generate commissions, transaction costs, and higher tax liabilities), are all strategies the portfolio manager may employ.

BILLING
Historically, management fees may have been tax deductible in certain circumstances, though the recent Tax Cuts and Jobs Act has made this more restrictive. However, in certain situations, clients may still be able to reduce the after-tax fee associated with the account by deducting the fee (in some trust and business tax situations). Talk to your CPA to see if this is an appropriate approach for you.

Another strategy, for portfolios with taxable assets and some nontaxable assets, is for the client to household the billing and have the entire fee taken from the taxable account so it may potentially be deductible. This varies by circumstance and situation. We always ask and advise clients to consult their tax preparer or CPA to make sure any tax management makes sense and is appropriate for their situation.


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City National Rochdale’s portfolio managers take active steps toward managing to the client’s tax budget and finding efficiencies where possible.

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Important Disclosures

Investment management services provided by City National Bank through its wholly owned subsidiary City National Rochdale, LLC, a registered invest¬ment advisor.

City National Rochdale, as a matter of policy, does not give tax or legal advice. Before implementation, you should consult with your other advisors on the tax, accounting, and legal implications of the proposed strategies based on your particular circumstances.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.

City National Bank provides investment management services in conjunction with City National Rochdale, its wholly owned subsidiary. Attached herein are communications prepared by City National Rochdale that reflect City National Bank’s investment products and services.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that invest¬ment objectives will be met, and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

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