Tax Reduction strategies to help your portfolio during a crisis.

During times of crisis, as with Covid – 19, there will be a lot of fluctuations in the markets and will directly influence your investment returns.

Rather than to panic during times like these, it is important to focus on your long term financial goals and on what you can control.

While you can’t control the movement of the markets, you can control your tax reduction strategies and portfolio construction.

A few tax strategies you can follow are:

  1. Determination of Investment Structure
    The Investment Structure you decide on is mostly driven by Tax legislation.
    Most structures can have the same underlying funds/shares but the biggest difference is the tax benefit you get when investing in these structures.
    For example:
    Retirement annuities/ Pension Funds you get tax relief on the contributions you make and you don’t get taxed on the returns.
    Tax free savings you don’t get tax relief on the contribution but you don’t get taxed on the investment returns.
    Flexible Investments you get taxed in your own name at you own marginal tax rate.
    Endowments you get taxed in the product at 30% (12% Capital Gain). For high net worth investors/trusts this tax rate is probably lower than their own.
  2. Asset Allocation in Investment Structures
    As mentioned with every structure there are different tax treatments.
    When determining your overall asset allocation it important to decide what assets you want to be held in a non taxable investments and what assets to keep in taxable investments.
    An asset allocation strategy requires to look at the total asset allocation of a person and not just per product level.
  3. Tax loss harvesting
    Tax loss harvesting is a strategy in which certain investment assets are sold at a loss in order to reduce your tax liability at the end of the year.
    You can use tax loss harvesting to offset capital gains that result from selling other investments or assets at a profit.
  4. Withdrawal sourcing
    You can with draw most of your cash flows from taxable products and wait on withdrawing from non taxable products.
    You can also make use of the capital gains exemption you get each year.

While taxes won’t be the sole driver of investment returns and decisions, they should be an important consideration.

Although you can’t control the stock market, there are plenty of proactvie planning and tax reduction strategies that you can take advantage off.

As David Bach said: “In fact, what determines your wealth is not how much you make but how much you keep of what you make.”

PJ Botha CA(SA), CFP ®

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