As April 15 approaches, investors are focusing on taxes and how to reduce the tax drag on their portfolios. While there isn’t much that can be done to cut last year’s taxes, there are steps that investors can take now to lower expenses for 2024.
In a report by Jared Woodard, an investment and ETF strategist at Bank of America, he recommends auditing portfolios to understand where tax costs can be lowered. Woodard highlights four sources of taxable income: qualified dividend income, return of capital, long-term capital gains, and ordinary dividends/short-term capital gains. For investors seeking tax-advantaged income, master limited partnerships (MLPs) offer attractive yield opportunities, particularly through ETFs like Global X MLP & Energy Infrastructure ETF (MLPX) and Global X MLP ETF (MLPA).
Additionally, investors may want to consider ETFs that distribute qualified dividend income at lower tax rates, such as iShares US Consumer Staples ETF (IYK) and Utilities Select Sector SPDR Fund (XLU). For exposure abroad, ETFs like iShares MSCI Indonesia ETF (EIDO), iShares Latin America 40 ETF (ILF), and iShares International Select Dividend ETF (IDV) offer qualified dividends at lower rates.
Closed-end funds, like MFS’ Municipal Income Trust (MFM) and Nuveen Municipal Credit Income Fund (NZF), provide tax-exempt payouts with the potential for enhanced returns over the long run, though leverage costs should be considered. With these strategies in mind, investors can work towards reducing their tax burden and optimizing their portfolios for the year ahead.
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