Tax Planning for Brokerage Accounts: What High-Income Investors Should Know

Tax Planning for Taxable or Brokerage Accounts

Nearly everyone has a retirement plan through work but an underutilized tool is the brokerage account.

A brokerage account can be used for: 1. Having access to funds pre-retirement 2. You can borrow against it (more on that below) 3. Potential for 0% capital gains tax 4. Unlimited amount of investments to choose from 5. Multi-purpose use for the "in-between" phase of life: farther out than keeping money in a savings account and pre-retirement phase 6. Losses can be harvested to offset other capital gains (sale of a business, real estate, etc)

What are the Tax Implications of a Brokerage Account

Dividends If you own a stock, ETF, index fund, or mutual fund you likely receive dividends. Dividends are payments made by a company to its shareholders from profits.They can be classified as either qualified or non- qualified, which affects how they are taxed.

Qualified Dividends: Qualified dividends benefit from the lower “capital gains” tax rates IF: they are paid by a U.S. corporation or a qualified foreign corporation, and the stock needs to be held for more than 60 days within the 121-day period around the dividend date.

Non-Qualified Dividends: Non-qualified dividends don’t meet these requirements and are taxed as ordinary income.

Interest Income Interest income comes from bonds, savings accounts, and other fixed-income investments, and it’s either taxable or tax-exempt.

Taxable Interest: Taxable interest, from corporate bonds, savings accounts, or taxable municipal bonds is subject to both federal and potentially state taxes. Interest from Treasury bonds and other federal government obligations is subject to federal income tax but is exempt from state and local taxes.

Municipal Bond Interest: Municipal bond interest, from debt issued by state or local governments, is exempt from federal income taxes. It is also typically exempt from state taxes if the bonds are issued in the taxpayers’ resident state.

Capital Gains or Losses Capital gains or losses refer to the profits or losses realized from selling investments, such as selling a stock, bond before maturity, ETF, or mutual fund. These gains or losses are classified as short-term or long-term based on how long the asset has been held.

Short-Term Capital Gains: For assets held for one year or less, gain is taxed at ordinary income rates. Long-Term Capital Gains: For assets held for more than one year before sale, the preferential long-term capital gains rates apply. Net Losses: If you have a temporary loss in your brokerage account, you can capture this loss and use it to offset any capital gains, whether those gains are in your brokerage account or from a sale of a business or real estate. If net capital losses exceed capital gains, up to $3,000 can be used to offset ordinary income. Any additional losses can be carried forward indefinitely to offset future capital gains or other ordinary income in $3,000 increments per year.

Net Investment Income Tax In 2010, the Affordable Care Act (ACA) brought the introduction of the Net Investment Income Tax (NIIT), a 3.8% surtax on top of the capital gains tax. This tax applies to individuals above $200,000 or married couples above $250,000 of income.

This tax is applied to:

Traditional investment sources: Interest and dividends. Rental income Annuity payments Income from passive activities: Such as passive real estate investments or limited partnerships. Net capital gains: Sale of investments

Capital Gain or Loss Distributions: Have you ever received a capital gain tax bill even though you didn't sell any investments?

Mutual funds will buy or sell investments within its portfolio and it can generate capital gains or losses. At the end of each tax year, the fund must distribute these gains to its shareholders, who are then liable for taxes on those distributions, even if they didn't sell their shares. Exchange Traded Funds (ETFs) typically pass minimal capital gains to investors which can make them more tax efficient than a mutual fund.

Borrowing from a Brokerage Account

Most custodians will allow you to use a Pledge Asset Line from your brokerage account. This means you can borrow from your brokerage account without ever selling it.

The benefits would be if you have short term capital gains in your brokerage but needs funds, you avoid paying the ordinary income tax on the gains. Or if long term and are in a high tax bracket, you might be paying 23.8% capital gains tax.

Example: Need $200,000 for down payment Cost Basis: $100,000 Current Market Value: $200,000 Capital Gain Tax: $23,800 The cost (tax) to access that $200,000 is about 11% Not to mention the potential opportunity cost of taking funds out of the market

The other option is to borrow.

The normal rate to borrow right now is SOFR (currently 3.6%) + anywhere from 2.4% - 4.4% depending on how much investments you may have with a Custodian. We are using Schwab as an example here. There can be an additional discount as well ranging from 0.25 - 1% depending on total investments.

Most people are going to fall around SOFR at 3.6% + 3.9% - 0.25% discount = for a total rate of around 6.95%. Still better than the 11% it would cost to sell your investments.

Given the volume of investments we manage, my partner firm Focus over $500billion, we have negotiated the rate to SOFR + 1% which would be around 4.6% currently.

The total cost of the loan would depend on how quickly you could pay that back and whether that was worth it vs just selling from the brokerage account.

It's important to note that the SOFR rate is variable. It loosely tracks the Fed Funds rate in terms of larger rate changes.

In this example at 4.6%, if you could pay back the loan around 4 years it would cost about the same as the capital gains tax you would have paid if you sold. On top of that, your money would have stayed in the market that whole period.

"The first rule of compounding is to never interrupt it unnecessarily". - Charlie Munger

Mortgages with Schwab

Were you aware there are discounts for mortgages if you have assets with Schwab?

0.25% discount: $250k - $1mil 0.5% discount: $1mil - $5mil 0.75% discount: $5mil - $10mil 1% discount: $10+mil

For clients of ours, this discount applies to values in your Brokerage Account + if you have any assets in a Schwab Checking or Savings account. We are finding rates to be in between 5-6% with these discounts.

Annual Reminder of Our Investment Principles:

• We are long-term, goal-focused, plan-driven investors. Our investment policy is to pursue financial goals by investing in broadly diversified portfolios of quality equities.

• We believe that the economy cannot be consistently forecast, nor the markets consistently timed. We find no predictable pattern in the way markets react to, or choose to ignore, economic developments.

• The only way to be reasonably confident of capturing the full return of equities is to ride out their frequent, sometimes significant, but historically always temporary declines.

• We do not react to, much less try to anticipate, economic and/or market events. As long as your long term goals remain unchanged, so will our plan for their achievement. And as long as our plan remains constant, so will your portfolio, except for rebalancing and tax loss harvesting opportunities.

• We believe that long-term compounding of quality equities is the most important force guiding us toward the achievement of your goals.

• In 2025, the broad equity market completed its third straight year of double digit returns, driven by a strong economy and significantly increased corporate earnings. The S&P 500 ended the year up 16.39%.

• The consensus of analysts’ forecasts is for even stronger earnings gains approaching 15% in each of 2026 and 2027 (source: Yardeni Research).

• Somewhat remarkably, profit margins have continued to expand—to 13.1% in the third quarter of 2025, the highest in 15 years (source FactSet). One would have thought that inflation in companies’ costs colliding with a straitened consumer’s resistance to price increases would have been a significant headwind here. So far, at least, one would have been quite wrong.

• The single important weak spot has been the employment picture, which has continued to soften. But even this has its significant bright side: strong economic growth and a flattish employment situation mean that per capita productivity has been rising strongly. Unemployment may have recently ticked up to 4.7%, but the other 95%- plus of the workforce is putting out significantly increased products/services per hour; that allows companies to raise wages without triggering inflation.

• After six straight rate cuts, Federal Reserve monetary policy is 175 basis points looser than it was a year ago, even with sticky CPI inflation still pushing three percent. It seems more than reasonable to expect the lagged effects of all this easing to begin showing up in 2026.

• The middle class in particular is set to enjoy tax refunds this filing season which have been variously estimated around $150 billion, or half a percentage point bump in GDP. The main engines of this are a higher standard deduction and (especially) a temporary restoration of the SALT tax deduction cap to $40,000 from $10,000. This would seem to be a potentially meaningful near-term economic tailwind.

• It would not surprise us in the least if much or most of the above salutary data come as news to you— except, of course, the part about the softening labor market, which journalism has trumpeted to the skies. In our opinion, there’s good information in this for us. To wit, the economic/financial “news” we get tends to skew overwhelmingly negative by conscious design.

• The fact remains that a very strongly rising equity market may (and indeed should) have taken these data into account—and maybe then some. Thus, the burning question all year long was “Are we in an AI bubble?” This replaced the previous year’s burning question “When and by how much will the Fed cut rates?” Which in turn replaced 2023’s “Will there be a recession?”

• There was no recession, but that’s beside the point. Which is that the universal burning question is usually if not always the wrong question, and a distraction to the well diversified long-term investor—like us.

• There can be no question that the broad equity market is more heavily concentrated in a few huge tech stocks—which can’t all be going to win the AI race— than it’s ever been in our investing lifetimes. And that this concentration has the Index selling at a price/earnings multiple in the neighborhood of its historic peaks.

• Our response to this is twofold: (a) Valuation is not, never was and never will be an effective market timing tool. And (b) your imminent portfolio rebalancing will address this issue forcefully.

• All of this suggests to us that the next significant market shock—and there always is one; they come along with almost the frequency of the crosstown bus—will probably come out of deep left field (in the jargon, an unknown unknown, as opposed to a known unknown like valuation or the national debt). And like all the shocks past, and all those yet to come, it will have very little to do with us, other than as a potential bargain-hunting exercise.

• We are following a plan that has always “worked” in the very long run, in that it has ultimately achieved the goals of investors like us. We do not accept that “this time is different” regardless of what “this” may be at any given moment. And thus we don’t adjust our strategy to accommodate the fads or fears of that moment. We don’t go to cash during market panics, and we don’t bet the ranch on “new era” miracles… like AI.