Blue Bell PWM


Let’s Talk Taxes!

Scott Miller, Jr.

Scott Miller, Jr.

Managing Partner

July 10, 2019

There is only one reason why anyone invests their savings, to earn a return on that invested capital. However not all gains are created equal; in fact, two separate investments, both earning the same 5%, can have very different bottom lines. Why you may ask? Because of taxes. Taxable income and short-term capital gains are generally taxed at a higher rate than long-term capital gains and in many instances the difference is significant. To qualify as a long-term capital gain, an investment needs to be held for 1 year or greater prior to being sold. Investments that are held for less than 1 year and sold at a profit are considered short term capital gains and are taxed at your income level. Taxable income includes earnings such as salary, wages, and bonuses but also includes taxable fixed income.

Similar to income taxes, the rate paid on long-term capital gains is determined by adjusted gross income; please see the chart below.

This is an advantage that you may not be aware of with our buffered structured investments.  We invest in the buffered notes to provide partial protection vs declines in the equity markets. Each note typically provides a buffer of 10% versus declines in the underlying index such as the S&P500. We negotiate the terms of these notes with many of the large investment banks and part of that negotiation process is ensuring that the issuing banks believe that any gains would qualify as a long-term capital item as long as the notes are held for one year or greater.

Many brokers reduce risk using taxable fixed income mutual funds. Not only do we believe that over the long-term the structured notes will provide a superior return, the income derived from those mutual funds will be taxed at income rates, not long-term capital gains rates like the notes.  In other words, you keep more of your earnings by investing in the structured notes.

Many factors contribute to your ultimate tax rates and some filers will be subject to a 3.8% net investment income tax rate as part of the affordable care act. Take for instance a married couple that files jointly and earns $400,000 in income. IF that couple were to earn $100,000 in long-term capital gains vs. taxable income, the tax savings would be approximately $20,000. That is a major difference in after tax returns. 

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Let’s Talk Taxes!

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