Conventional Tax Alpha Tactics

The column on the left highlights the various tax alpha tactics at your disposal. Each tactic, though, comes with a requirement. We can translate the word “requirement” into planning time, execution time, and labor costs.
You see, producing tax alpha with these tactics is customized to each client. Since competition prevents you from raising prices, time and labor costs means that your per client profits decrease when executing tax alpha services. While we’ve seen that increasing after-tax returns is of high demand among clients, advisors find it increasingly challenging to deliver these services.

Let me note one tax alpha tactic that isn’t often specialized: municipal bond investing. For tax-aware advisors looking to produce tax alpha, some would consider municipal bonds as a staple for high-income clients, particularly muni bonds that are based on the clients’ state of residence.

There are a couple key points about muni bond investing and their taxable structure. First, if muni bonds increase in price and are sold with a gain, capital gains tax rates apply. Second, private activity bonds such as those issued to fund stadiums, hospitals, and public housing are subject to the alternative minimum tax.

If you invest in specific muni bonds, then the capital gains and AMT are under your direct control, but this does increase your service costs in managing customized portfolios. However, when investing in a muni bond mutual fund, be aware that what is presumed to be tax free may, in fact, not be 100% the case.