Q4 Investment Planning: What to Do Now to Reduce What You Owe in 2026

As the calendar turns to the fourth quarter, investors often seek advice on ways to proactively implement tactics to reduce taxes on their portfolios. In this article, we briefly outline 5 such strategies that you might use to save thousands of dollars in investment taxes over the next several years.

1. Implement Loss Harvesting

One benefit of holding a diversified portfolio is that, if structured properly, the securities typically will not move in tandem. This divergence of returns among asset classes not only reduces portfolio volatility but also creates a tax planning opportunity. When some holdings within a portfolio have experienced gains while others have declined, an astute adviser can use this situation to save clients thousands of dollars in taxes by performing strategic tax swaps prior to year-end. It is important to understand the rules relating to wash sales when executing such tactics. The laws are confusing, and if a mistake is made, your loss could be disallowed. Make certain your adviser is well-versed in utilizing tax offsets. 

Current tax law allows investors to realize losses to offset all realized gains in the current year, while additional losses can offset up to $3000 in income. Losses exceeding $3000 can be used to offset capital gains in future years.

2. Donate Appreciated Stock to Charity

Although charitable donations can reduce your tax bill, gifting cash may not be the optimal solution. In many circumstances, gifting appreciated stock to a qualified charity is a superior alternative to donating cash. Consider the following example to help illustrate the benefit of gifting appreciated stock:

Investor Isabel has allocated 5% of her portfolio to a growth stock with significant upside. Several years have passed, the security has experienced explosive growth, and the stock now represents 15% of portfolio assets. Suddenly, Isabel has a concentrated position with significant gains, and the level of risk is no longer consistent with her long-term objectives. The sound practice of rebalancing the portfolio then becomes very costly, because liquidation of the stock could create a taxable event that may negatively impact net returns.

By planning ahead, Isabel may be able to gift a portion of the appreciated security to a charitable organization able to accept this type of donation. The value of her gift can be replaced with the cash she originally intended to donate to the charitable organization, and, in this scenario, the cash will create a new cost basis. The charity can liquidate the stock without paying tax, and Isabel has removed a future tax liability from her portfolio. Implementing the gifting strategy offers the potential to save thousands of dollars in taxes over the life of a portfolio.

3. Accelerate Your Gifting in High Tax Years

Did you sell your interest in a practice or med spa? Were you the recipient of an unusually large bonus? Did you experience a large capital gain from selling an appreciated stock or from the liquidity event of a private investment? 

You may be a candidate for a donor-advised fund (DAF). A DAF is an investment account designed to support charitable organizations. One of the appealing benefits of a DAF is that you can receive a tax deduction for your contribution, prior to sending the donation to the organization(s). An investor could prefund a 5- or 10-year gifting program and receive the entire deduction in the year the DAF is funded. Donors are not required to designate the final recipient prior to funding the DAF, providing the opportunity to be deliberate in assessing the organizations or charities that are most meaningful to the donor.

Rules can be complex, and the differences in the DAFs offered by custodians can be drastic. We would recommend working with your team of advisers prior to implementing the strategy described.

4. Consider Owning Municipal Bonds in Taxable Accounts

Most municipal bonds are exempt from federal taxation. Certain issues may also be exempt from state and local taxes. This may be attractive to many investors whose income puts them in the top income tax bracket. Under these circumstances, a municipal bond yielding 4% will provide a superior after-tax return in comparison with a corporate bond yielding 6.5% in an individual or joint registration, in a pass-through limited liability company, or in many trust accounts (assumes a 37% federal income tax and 3.8% net investment income tax). 

5. Implement an Asset Location Strategy

Many are familiar with the term asset allocation as it relates to one’s portfolio. However, a common mistake made by many investors is failure to implement an asset location strategy. There are 2 components to successfully implementing this strategy. The first step is understanding how various account registrations are taxed, and the second is recognizing how the underlying investment products and their respective income are taxed. 

Individually owned brokerage accounts, Roth individual retirement accounts, and qualified plans are subject to various forms of taxation. It is important to use the tax advantages of these tools to ensure they work for you in the most productive manner possible. It may be useful to share a few examples of aligning products and account registration for tax optimization.

Investment vehicles paying qualified dividends are subject to a lower tax rate and therefore are preferred in an individual or joint brokerage account. High-yield bonds and corporate debt taxed at higher ordinary income rates are typically recommended for qualified accounts. Growth stocks, which may not distribute any income, can be a great wealth accumulation tool in nonretirement accounts that tax income annually.

Pay Attention to Investment Taxes at Year-End 

Implementation of one of these tactics alone, in any given year, may modestly reduce your tax bill. However, in combination and over time, they can significantly reduce taxes and increase net investment returns. Investors should choose an adviser who will help them look beyond portfolio earnings and focus on strategic after-tax asset growth, especially toward the end of the calendar year.

David Mandell, JD, MBA, is an attorney and author of more than a dozen books for doctors. He is a partner in the wealth management firm OJM Group (www.ojmgroup.com).

Andrew Taylor, CFP, is a partner and wealth adviser.

They can be reached at 877-656-4362 or mandell@ojmgroup.com.

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Disclosure

OJM Group, LLC. (“OJM”) is an SEC-registered investment adviser with its principal place of business in the State of Ohio. SEC registration does not constitute an endorsement of OJM by the SEC, nor does it indicate that OJM has attained a particular level of skill or ability. OJM and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which OJM maintains clients. OJM may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. For information about OJM, please visit http://adviserinfo.sec.gov or contact us at (877) 656-4362.

This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice, or as a recommendation of any particular security or strategy. Investment involves risk and possible loss of principal capital. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently; accordingly, information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.