Tax Impact on Portfolios

Our focus here is on the degrading impact taxes have on wealth, because taxes occur every year. The top 1% of earners make $450,000 and at this level the marginal federal rate is almost 40%. If you include the Medicare surtax, the top marginal rate is over 43%.

For clients in high-tax states, a marginal rate over 50% is a fact of life. Portfolio taxes, whether from portfolio income or realizing gains, is considered marginal income since it is not earned. This means that the blended federal and state income tax is claimed first against earned income, which is closely monitored by the IRS.

So, you have a dilemma. Your clients are anxious about market volatility so you structure the portfolio to keep it resilient in the face of a market decline. However, many of the investments used to moderate volatility, investments such as fixed income, alternative investments, REITs, and dividends from non-US stocks , are subject to income tax rates each and every year.