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Investors face ‘larger tax bills’ this year from 2021 portfolio gains, strategist says

In this article:
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Steward Partners Global Advisory Executive Managing Director Eric Beiley joins Yahoo Finance Live to discuss what to look for this tax season, tax efficient investing, and how to get the most out of your refund.

Video Transcript

JULIE HYMAN: Well, we talked earlier in the week about why people might be getting larger tax bills than they perhaps had anticipated. One other reason could be, well, because their portfolios did pretty well last year. Let's talk more about that with Eric Beiley, Steward Partners Global Advisory executive managing director joining us as part of this week's FA corner. Eric, thank you for being here. So first of all, talk us through what effect last year's rally in the markets, broadly, is having on people's tax bills this year.

ERIC BEILEY: Yeah, you know, April 18 is next week, or next Monday. So right now, clients, investors are all finalizing their taxes. And what we're seeing is clearly larger tax bills. And that's, as you said, because 2021 was just a very unique year. I mean, all asset classes really across the board did well, equities of all kinds. Fixed income did well. Real estate alternatives did well. And so it was a good thing, right? People's portfolios were up. Their net worths were up. But what we're seeing is pretty much larger tax bills than we've seen in past years.

BRIAN SOZZI: Eric, help our viewers understand this. Because we have a lot of millionaires that are sitting on large sums of money that watch us daily that have been making money in the market, to a large extent, the past few years. Should they be selling some of their stocks today just to account for any losses?

ERIC BEILEY: No, I mean, you know, taxes-- I mean, typically, you look at taxes at the end of a calendar year, right? So now, I would not be selling just for taxes because now, we're in an uncertain environment, right? The markets are down. And so I would not be making portfolio decisions today on taxes. Typically, in the last year, you review your portfolio. You see-- what you look at is your realized gains. Like, how many gains have you taken, whether in individual positions, index funds, mutual funds, whatever you have.

And then you try to look across your portfolio and see, OK, where can I offset some of these gains? And that's where you look in your portfolio. And if you have positions with losses, then it makes sense. It does make sense to offset those gains because under current law, you can only write off $3,000 right now in losses. So not a lot for people with sizable portfolios. So if they don't have-- if they don't-- I'm sorry, go ahead.

JULIE HYMAN: I was just going to say, so basically, it's too late in terms of trying now to offset those gains at this point.

ERIC BEILEY: It is. For taxes, yeah, it's a calendar year, right? January 1 to December 31. So even though we have until April, this year, 18 to file our taxes, we are doing it all for what happened in 2021.

JULIE HYMAN: And on the flip side, if people are getting these big tax bills and they have to pay them, where are you suggesting that folks look in their portfolios if they need to raise some cash in order to pay the tax bill?

ERIC BEILEY: Sure. Yeah, I mean, those are discussions me as an advisor are having with my clients, or individual investors have to look at their portfolio because people have to write these tax checks. And so April historically can be bumpy in the markets because people are, instead of looking for opportunities, they're looking at their portfolios, where they might need to raise cash.

And so, obviously, you first want to look at the most liquid assets you have. So stocks funds, ETFs are very easy assets you can sell for cash. Then you might want to look at other-- fixed income possibly would be other areas you would sell. But I would say the best part is you want to look at the most liquid assets and positions that have done well. Certainly, take a little off of that position to rebalance, and use that cash for your tax bill.

BRIAN SOZZI: Eric, one of my good friends is a corporate accountant. And he recently told me that all of his clients owe a lot of money. And he's been surprised. Seemingly, every client owes money. Have you had the same experience?

ERIC BEILEY: Absolutely, Brian. Yeah, this year, the tax bills I'm seeing for my clients are substantial. And again, you know, last year was just a unique year. Assets across the board did very well. There was a lot of trading. So people, investors, they ended the year very happy, a lot of smiles, because they saw they were up double digits. Real estate was up. People's homes, investment properties were up. But now, unfortunately, we got to pay for it. And so these are harder discussions to have. Especially in this more volatile market, where am I going to get the cash to pay my tax bill?

JULIE HYMAN: Yeah, and that is a really good reminder, as you mentioned, to sort of watch the markets this month to see if there's any evidence of people trying to raise cash in order to pay those taxes. Eric Beiley, thank you so much for your perspective. Steward Partners Global Advisory executive managing director, thanks.