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Establishing a tax management strategy for your investments may help you keep more of your returns.

Key Takeaways Applying an active tax-management strategy for your investments may help reduce your overall tax burden. The types of investments you choose may impact how you’ll pay taxes on the earnings. If your capital losses exceed your capital gains, the excess capital losses can offset up to $3,000 of ordinary income each year.   

Wealth Management Why Choose Tax-Aware Investing?

By implementing tax-efficient strategies as part of your investment process you may increase potential portfolio returns and achieve your goals faster. Watch to learn more about how Morgan Stanley Total Tax 365 may help you save on taxes and keep more of what you earn.

Share Even investors who spend a lot of time thinking about how to maximize their portfolios for performance may lack a strategy when it comes to minimizing taxes on those returns. 

 

Applying an active tax-management strategy for your investments may help reduce your overall tax burden. Even small reductions in tax payments today can have a big impact on your wealth tomorrow.

Some investors only think about taxes during tax season in the spring, but there are opportunities for savings all year-round. Consider putting in place some or all of the following potential solutions.

Use Tax-Aware Asset Location
Different kinds of accounts are subject to different tax rules. A tax-aware asset location strategy that accounts for those differences may increase your after-tax returns. For example, by allocating income-generating taxable assets which may generate income, such as dividend-paying stocks and corporate fixed income, to tax-deferred and tax-exempt accounts (e.g. Individual Retirement Accounts), you can help minimize your exposure to current taxes. In contrast, consider purchasing nontaxable assets, such as municipal bonds, in taxable accounts. Your Financial Advisor can assist you and your tax advisor in structuring a tax-aware asset location strategy across your accounts.

Consider Tax-Favorable Investment Solutions
Many investments allow you to save for a variety of goals while also offering tax benefits. Municipal bonds, which are typically exempt from federal (and in many cases, state and local) taxes, for example, can be a tax-efficient investment against current and potentially higher tax rates. Beyond municipal bonds, consider tax-efficient mutual funds or separately managed accounts that aim to limit the number of taxable events within your portfolio.

 

If you’re saving to cover future education costs, a 529 savings plan is a tax-advantaged way to save for qualified educational expenses, such as college tuition. 

 

For retirement savers, diversifying your retirement portfolio with a variable annuity may provide tax-deferred growth potential, guaranteed lifetime income, increased retirement savings, equity upside potential, and a death benefit for named beneficiaries. 

 

Finally, if you’re charitably inclined, consider giving to a donor-advised fund (DAF). When you donate to a DAF, you may become eligible for a federal income tax deduction on the contribution if you itemize deductions, while also retaining advisory privileges to recommend which charities should receive the donated amount currently or in later tax years. This amount may grow through investments over time.

Employ Tax-Loss Harvesting
Current U.S. federal tax law permits tax-loss harvesting, a process by which you can offset capital gains with capital losses incurred during that tax year, or carried over from a prior tax year, potentially lowering your overall federal income tax liability. This can be a particularly useful strategy during years, like the past one, where markets have experienced significant turbulence.

 

Capital gains are generally the profits you realize when you sell an investment (e.g. stock, personal real estate, art, etc.) for more than you paid for it, and capital losses are generally the losses you realize when you unload an investment for less than you paid for it.

 

If your capital losses exceed your capital gains, the excess capital losses can offset up to $3,000 of ordinary income each year. You can carry forward any additional excess capital losses as potential tax offsets in future years.

 

While you may want to use the proceeds from harvested losses to purchase other investments, you’ll want to make sure you don’t inadvertently participate in a “wash sale,” which occurs when you sell or trade stock or other securities at a loss, then buy substantially identical stock or other securities within 30 days before or after the sale date. Talk to your Financial Advisor about your options.

Max Out Retirement Plans
Consider maxing out contributions to your account through your employer’s retirement benefits, such as a 401(k) plan, since contributions typically occur on a pretax basis. Contributing to a traditional IRA can also lower your taxable income for the current year, since contributions may be tax-deductible.1 Because these are tax-deferred accounts, you generally won’t pay income taxes on contributions, or any earnings from your investments, until you withdraw funds.

 

For the 2025 tax year, you can contribute up to $23,500 to your 401(k) account and, if you are age 50 or older, you may be able to make an additional catch up contribution up to $7,500 (or, for those who are ages 60 to 63, $11,250), if permitted under the plan.2 

Engage in Legacy Planning and Gifting For 2025, the federal estate tax exemption increased to $13.99 million per individual and $27.98 million for a married couple.  Regardless of whether you will generate estate taxes, all investors should have an estate plan that reflects their wealth-transfer goals and objectives.

 

Trusts can be an effective tool to reduce estate taxes or assure a fair distribution of wealth among family members. Taxpayers with taxable, or potentially taxable, estates who would like to leave money to their family members should consider making lifetime gifts to those family members now. This can be a tax-efficient wealth-transfer strategy because it removes any future appreciation in the gift’s value from the client’s taxable estate.

 

Also, consider making annual exclusion gifts to individuals before year-end; for 2025, these can be gifts of up to $19,000 per recipient for individual taxpayers and $38,000 for married couples electing to split gifts.3 Keep in mind that gifts in the form of tuition payments made directly to an educational organization, as well as medical expense payments made directly to the provider, are not taxable gifts and do not count against the annual exclusion amount for gifts or reduce your federal lifetime gift tax exemption. 

Help Minimize Your Overall Tax Bill
With Total Tax 365, Morgan Stanley Financial Advisors offer tax-smart techniques and strategies to help you reduce the impact of taxes, all year round. Talk to your Morgan Stanley Financial Advisor to learn more.

 

In addition, if you have complex tax planning needs, your Morgan Stanley Financial Advisor can connect you to experienced tax professionals at leading U.S.-based providers across the country to help ensure your tax strategy is optimized.

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Wealth Management What Is Tax-Loss Harvesting? Learn about tax-loss harvesting and how some investors use it to opportunistically reduce their current tax bills. Wealth Management 5 Steps that May Reduce Taxes on Your Income and Portfolio A key strategy for boosting long-term investment returns is being smart about tax efficiency. Wealth Management Morgan Stanley Financial Advisors Help You Go Further You know your way around the markets but as your life grows more complex, you just don’t have the time to be a do-it-yourself investor anymore. When you partner with one of our Financial Advisors, you won’t have to. Wealth Management What Is Tax-Loss Harvesting? Wealth Management 5 Steps that May Reduce Taxes on Your Income and Portfolio Wealth Management Morgan Stanley Financial Advisors Help You Go Further More Insights Discover more insights for your portfolio. 

Your Guide to Tax-Efficient Planning Wealth Management Portfolio Insights Footnotes

1 Contributions to traditional IRAs may be tax-deductible depending on whether you or your spouse is covered by a qualified retirement plan at work, your modified adjusted gross income and federal tax filing status. Consult with your financial advisor/tax advisor to see which account is right for you.

2 IRS.  “401(k) limit increases to $23,500 for 2025, IRA limits remains $7,000” https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000 Accessed January 6, 2025

3 IBID

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This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this material may not be appropriate for all investors. Morgan Stanley Wealth Management (“Morgan Stanley”) recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

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Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Interest on municipal bonds is generally exempt from federal income tax; however, some bonds may be subject to the alternative minimum tax (AMT). Typically, state tax-exemption applies if securities are issued within one’s state of residence and, if applicable, local tax-exemption applies if securities are issued within one’s city of residence. The tax-exempt status of municipal securities may be changed by legislative process, which could affect their value and marketability.

Mutual funds and variable annuities are sold by prospectus. The prospectus contains the investment objectives, risks, fees, charges and expenses, and other information regarding the mutual fund or variable annuity contract and its underlying investments, which should be considered carefully before investing. Prospectuses for the mutual fund or the variable annuity contract and its underlying investments are available from your Financial Advisor. Please read the prospectus carefully before investing.

Variable annuities are long-term investments designed for retirement purposes and may be subject to market fluctuations, investment risk and possible loss of principal.

All variable annuity guarantees, including optional benefits, are based on the financial strength and claims-paying ability of the issuing insurance company and do not apply to the underlying investment options.

Variable annuities are offered in conjunction with Morgan Stanley’s licensed insurance agency affiliates.

The 529 Plan Program Disclosure contains more information on investment options, risk factors, fees and expenses, and potential tax consequences. Investors can obtain a 529 Plan Program Disclosure from their Financial Advisor and should read it carefully before investing.

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