3 tax questions every investor should ask

By making even small reductions to your federal taxable income today, you may enhance the amount of wealth you can accumulate over time and accelerate the pace at which you build it. Smart tax planning can also help you retain more money for the people and causes you care about.

As you approach year-end, consider how strategic tax planning can help you reach your financial goals in 2026 and beyond. Here are three key questions to guide your considerations.

One key strategy during your working years is to save as much as you can in your tax-advantaged accounts, including a pre-tax 401(k) plan and an Individual Retirement Account (IRA). Making pre-tax or tax deductible contributions to these accounts, up to IRS limits, may help you reduce your taxable income today while making progress toward your long-term goals like retiring with a sizeable nest egg.

If you’re charitably inclined and looking to reduce your taxable income through charitable contributions, you may want to consider these options:

1. Direct donations: In 2025, if you itemize deductions, you may be entitled to a charitable contribution deduction of up to 60% of your adjusted gross income for cash distributions, with some limitations.¹ If you’re 70½ or older, you can make a qualified charitable distribution (QCD) from your IRA, donating up to $108,000 to charity in 2025, and the amount of the QCD will not be subject to federal income tax, which, if you are 73 or older, can also satisfy required minimum distributions.²

2. Donor-Advised Funds (DAF): Through a DAF like the Morgan Stanley Global Impact Funding Trust, you can donate portfolio assets and if you itemize deductions, you may be entitled to a charitable contribution deduction, subject to adjusted gross income limitations.³ These assets can grow tax-free with respect to federal income tax in the DAF until you decide which charities should receive donations.

You may also want to work with your own legal or tax professional to consider taking advantage of additional federal income tax deductions in the One Big Beautiful Bill Act (OBBBA). For example, individuals aged 65 or older may be able to deduct up to an additional $6,000 (up to $12,000 for married couples) on top of the $2,000 standard deduction for seniors. Note that the deduction phases out for taxpayers with modified adjusted gross income over $75,000 ($150,000 for joint filers).⁴

In taxable investment accounts, like a nonretirement brokerage account, it may be a good idea for some investors to consider holding securities for more than a year. This could allow any appreciation on those assets to be taxed at the lower long-term capital gains tax rate when the assets are sold (0%, 15%, 20% depending on income, plus 3.8% Net Investment Income Tax for high earners). Conversely, assets that are held for less than a year are taxed at ordinary income tax rates (up to 37%).

Tax-loss harvesting is another way to potentially lower your federal tax obligations in a taxable account. When selling investment securities for less than you originally paid for them, you may be entitled to recognize a capital loss for federal income tax purposes, and you may be able to use those capital losses to offset taxable capital gains elsewhere in your portfolio, and then reinvest the proceeds.⁵

If you offset all your capital gains for the year and still have capital losses remaining, you may be able to apply up to $3,000 of excess capital losses to offset your ordinary income. Still have capital losses after that? If so, you you may be able to use them to offset capital gains or ordinary income in future tax years.

You may also want to consider a longer-term strategy known as tax-aware “asset location” to optimize potential after-tax returns. This generally involves:

• Using tax-advantaged accounts to hold income-generating assets, such as high-dividend-paying stocks, to help minimize your exposure to current potential tax liabilities.
• Using taxable accounts to invest in tax-efficient, lower-growth assets. These investments tend to generate less taxable income. For example,  municipal bonds, are exempt from federal income tax and, in some cases, state and local taxes.

Taking steps to minimize how much of your estate is subject to taxes may allow you to leave a larger legacy to the people you care about most.

One strategy involves making financial gifts to the next generation while you’re still alive. In 2025, federal law allows you to gift up to $19,000 per person per year ($38,000 for a married couple electing to split gifts) without owing U.S. federal gift tax. Gifts that exceed that amount will count toward your lifetime U.S. federal gift and estate tax exemption, which for 2025 is $13.99 million per person and $27.98 million per married couple.⁶ Direct gifts of medical expenses and tuition are also excluded from federal gift tax.

These are just some of the strategies that may help you reduce taxes on your income and investments, while helping you to manage future tax liabilities as you seek to build and preserve your wealth.

Tax-efficient investing is a dynamic and complex aspect of financial planning that requires careful consideration and strategic decision-making. By understanding and utilizing the various accounts, investment types, and strategies available, you may be able to enhance the potential after-tax returns of your portfolio.

For sophisticated investors, it’s advisable to consult with financial advisors or tax advisors who can provide personalized investment advice based on your specific financial situation and goals.

Article Footnotes

¹ IRS, Charitable contribution deductions, https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions

²  IRS Notice 2024-80 (Cost-of-Living Adjusted Limitations for 2025).

³ Effective in the 2026 tax year, taxpayers who itemize deductions and make charitable contributions will only be able to claim an income tax deduction to the extent that their qualified contributions exceed 0.5% of the donor's AGI. Amounts disallowed under this rule carry over for up to five taxable years. Also starting in 2026 tax year, the tax benefit of itemized charitable deductions will be capped at 35 percent, even for taxpayers in the 37 percent marginal tax bracket.

⁴ IRS, One, Big, Beautiful Bill Act: Tax deductions for working Americans and seniors, published July 14, 2025, https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors

⁵ Remember that the “wash sale” rules won’t allow you to deduct a loss on a current basis when you sell stock or securities at a loss but buy the same or substantially identical stock or securities within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date.

⁶ IRS, “IRS Provides Inflation Adjustments for Tax Year 2025,” https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025

CRC# 4960379 11/2025