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Understanding Investment Returns on Your Taxes



Sometimes, understanding the difference between your overall return for the year and your taxable gain for the year can be a bit confusing. WT Wealth Management creates portfolios with a diversified mix of assets. In addition, during the year, we may have sold some of the assets to create an asset balance that we think is appropriate. Some of these assets have probably gained value and some of them may have gone down in value. At the end of the year, we then work to minimize your taxes owed. We may decide to sell some assets that have experienced a loss during the year to offset some of the assets we may have sold during the year that experienced a gain. Other assets we will continue to hold in the coming year. By selling some of the losing assets, we can often make it so that you owe less to the IRS.

Understanding the Numbers on Your 1099 Form

The gains or losses on your 1099 tax statement from Schwab (or any asset custodian) for last year are not your actual total portfolio gains for the year. Your gain for the year can be found by comparing the total account value at the end of the year with the account value at the beginning of the year. Of course, you need to adjust for any withdrawals or contributions you may have made during the year.

Working Through an Example

Assume that you start the year with $300. You have $100 in each of three assets: A, B and C. At year end, asset A is up 20% to $120. Asset B is down 10% to $90 and asset C is up 30% to $130. Your total asset value is now $340 (the total of the three asset values: $120 + $90 + $130). You had a fairly good year with a gain for the year of $40 ($340 less the beginning value of $300). This is an annual return of 13.3%.

What Might Happen Near the End of the Year?

Let’s say you sell asset A for a $20 gain and asset B for a $10 loss. This is a net gain of $10. You do not sell asset C because you still like the asset, so no tax is currently owed on the $30 increase. Your Schwab account will report a $10 taxable gain, which is only 3.33%. But remember, you actually gained 13.3% for the year.

What is the tax impact of deferring gains?

Let’s assume you have a tax rate of 25%. This means that you owe 25% of the $10 gain that you realized for the year. This means that you will owe the government $2.50. But you have not sold asset C, so it remains in your portfolio with an unrealized gain of $30. Taxes on this gain can be deferred until you actually sell asset C in the future. If asset C had been sold, you would have owed $7.50 on that gain. By not selling asset C you keep the $7.50, for now, and it will continue to work for you.

What Causes Confusion

Every year we get calls from clients who are wondering why the 1099 tax statement from Schwab shows a gain that is less than they believe they earned. The 1099 from Schwab, for the example above, shows only the net gain of $10 from the assets that you have sold. At first glance it may appear that you only made $10 for the year, or a 3.3% gain. But the 1099 does not show the unrealized gain of $30 on asset C. So, for the year you actually earned $40 or 13.3%.

At WT Wealth Management, we intentionally take steps to keep the taxes you owe as low as possible.

Sincerely,

Allen Atkins



WARRANTIES & DISCLAIMERS

There are no warranties implied.
Any opinions expressed on this website are the opinions of WT Wealth Management and its associates only. Material listed on this website is neither an offer to buy or sell securities nor should it be interpreted as personal financial advice. You should always seek out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETF’s carry certain specific risks and part or all of your account value can be lost.

At WT Wealth Management we strongly suggest having a personal financial plan in place before making any investment decisions including understanding your personal risk tolerance and having clearly outlined investment objectives.

View Disclosure
WT Wealth Management is an SEC registered investment adviser, with in excess of $100 million in assets under management (AUM) with offices in Flagstaff, Scottsdale, Sedona and Tucson, AZ along with Jackson Hole, WY and Las Vegas, NV. WT Wealth Management is a manager of Separately Managed Accounts (SMAs). With SMAs, performance can vary widely from investor to investor as each portfolio is individually constructed and managed. Asset allocation weightings are determined based on a wide array of economic and market conditions the day the funds are invested. In an SMA, each investor may own individual Exchange Traded Funds (ETFs), individual equities or mutual funds. As the manager we have the freedom and flexibility to tailor the portfolio to address an individual investor's personal risk tolerance and investment objectives – thus making the account “separate” and distinct from all others we manage. An investment with WT Wealth Management is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Any opinions expressed are the opinions of WT Wealth Management and its associates only. Information offered is neither an offer to buy or sell securities nor should it be interpreted as personal financial advice. Always seek out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETFs carries certain specific risks and part or all of an account's value can be lost. In addition to the normal risks associated with investing, narrowly focused investments, investments in smaller companies, sector and/or thematic ETFs and investments in single countries typically exhibit higher volatility. International, Emerging Market and Frontier Market ETFs, mutual funds and individual securities may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability that other nations experience. Individual bonds, bond mutual funds and bond ETFs will typically decrease in value as interest rates rise. A portion of a municipal bond fund's income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains (short and long-term), if any, are subject to capital gains tax. Diversification and asset allocation may not protect against market risk or investment losses. At WT Wealth Management, we strongly suggest having a personal financial plan in place before making any investment decisions including understanding personal risk tolerance, having clearly outlined investment objectives and a clearly defined investment time horizon. WT Wealth Management may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption. WT Wealth Management's website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of WT Wealth Management's website should not be construed by any consumer and/or prospective client as WT Wealth Management's solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the internet. Any subsequent, direct communication by WT Wealth Management with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A copy of WT Wealth Management's current written disclosure statement discussing WT Wealth Management's registrations, business operations, services, and fees is available at the SEC's investment adviser public information website (www. adviserinfo.sec.gov) or from WT Wealth Management directly. WT Wealth Management does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to WT Wealth Management's web site or incorporated therein, and takes no responsibility therefor. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

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