Two money management firms that have specialized in offering tax harvesting strategies say business is way up since President Trump signed into law tax changes in Dec. 2017 that have severely restricted writing off state income taxes.
A key change, which will apply to the 2018 tax year, limits the amount of state taxes that can be deducted from federal returns to $10,000. The limit adds to the burden for investors in states with high state income taxes, like California and New York, drawing attention to tax reduction strategies like tax harvesting that aim to reduce federal capital gains taxes by offsetting stock gains with losses.
One of the firms, Parametric Portfolio Advisors, a division of Eaton Vance Corp, said assets under management in separate accounts in its index-based custom core tax harvesting strategy were up 29.31% between Oct. 2017 and Oct. 2018. At year-end, Parametric had around $62 billion in AUM in tax harvesting strategies, the largest of any money manager.
“We have had a nice pickup,” said John Moninger, managing director, retail sales at Eaton Vance, following the tax changes.
The tax-deferral strategies don’t offer dramatic returns over non-tax-harvesting investing, but for wealthy individuals—Parametric's minimum is $250,000—the benefits can add up as their portfolio size increases.
Typically, Moninger said, the Parametric custom core portfolios track within 1% of the index’s return while providing 1-2% in tax alpha.
Another firm, Managed Portfolio Advisors, a division of Natixis Investment Managers, said its assets under management in its tax harvesting strategies are up 30% in the last 12 months. MPA manages approximately $11.5 billion in tax harvesting strategies.
The fees to invest in such strategies generally ran between 30 and 40 basis points.
The worst state for investors dealing with an increasing tax burden is California. The maximum state tax in California of 13.3% for individuals earning more than a million dollars is applied to capital gains made by investors but starting in 2019 the state tax deductions used to reduce federal taxes won’t apply, except for the initial $10,000.
Neither firm has been able to quantify which states their increase in business is coming from, whether California and New York are fueling the boom for example- which have the number one and two highest state tax liability in the U.S.
“I think that the Trump’s changes certainly don’t hurt,” said Curt Overway, president and portfolio manager with Managed Portfolio Advisors, in explaining the overall increase in business in tax harvesting strategies.