Tax Day is here. How to pocket more of your portfolio’s return, according to Bank of America
The deadline to pay the tax man is here – and while it may be too late to slash your 2025 bill, there are a few steps that can help you shave down taxes for 2026, Bank of America found. April 15 is the federal deadline for taxpayers to timely file their income tax returns. While latecomers can go on extension and hand in their paperwork by Oct. 15, any sums owed must be paid by April 15. Investors who found themselves on the hook for hefty taxes on their holdings this time can take a few steps to avoid similar pain next year. In fact, boosting tax efficiency in your portfolio can create tax alpha – an extra kicker to your returns after you minimize tax drag. “War is uncertain, but taxes are not,” Jared Woodard, investment and ETF strategist at Bank of America, wrote in a Friday report. His team compared two portfolios, each allocated to 60% stocks and 40% bonds, and made one “tax insensitive” while the other was “tax aware.” Over a 30-year period, the portfolio that prioritized tax efficiency generated a post-tax average annualized return of 7.4%, compared with the “tax insensitive” portfolio’s annualized return of 5.9%. Woodard also drew up a few ideas to harness the power of tax-efficiency for investors and help them keep more of their return. Buybacks over dividends Share buybacks and dividends are both ways for companies to return excess cash to their investors, but only one of these methods is tax friendly. Share repurchases by themselves aren’t a taxable event to the investor, but qualified dividends are subject to levies – either 0%, 15% or 20% – regardless of whether the shareholder reinvests the money or spends down the income. Woodard warned that while high buyback strategies would’ve beaten common dividend strategies, companies may be tightening the reins on share repurchases as they commit capital to artificial intelligence and other expenditures. He recommended investors consider the Invesco BuyBack Achievers ETF (PKW) for focused buyback exposure. Look at municipal bonds Municipal bonds offer investors tax exempt income on a federal basis. Investors who reside in the issuing state get the additional benefit of pocketing that interest free of state and local taxes, too. These bonds could offer tax-equivalent yields that are up to 70 basis points higher than those of Treasurys with similar duration. Consider a taxpayer in the 32% tax bracket – and is subject to the net investment income tax of 3.8% – picking up a muni bond with a tax-free yield of 3%. That person would need to find a taxable investment yielding 5.63% to generate a comparable level of income, according to New York Life Investment Management . Woodard said that high-yield munis allow investors to capture solid income, and they have higher credit quality compared to high-yielding corporates. He pointed to the VanEck High Yield Muni ETF (HYD) as a way to get exposure to the space, as well as the iShares National Muni Bond ETF (MUB) for an investment grade muni play. Chasing yield? Own MLPs directly Master limited partnerships can boost investors’ income – but they also bring some tax complexity. These partnerships, which can include certain pipeline companies, offer attractive dividend yields because of their favorable tax treatment. MLPs aren’t subject to federal income taxes, but their investors pay levies on distributed income. Woodard recommended owning the MLPs directly rather than in an MLP fund. “Distributions from MLPs are treated as a return of capital, stepping up the cost basis for investors,” he wrote. Funds of MLPs, however, pay corporate tax on the income and pay taxable distributions to fund shareholders, the strategist added. There is a trade-off for that extra income. Partnerships send Schedule K-1s to their investors every spring, detailing the income received. Partners need this report to file their tax returns, and they will likely need to go on extension if the form arrives late. Woodard pointed to a trio of buy-rated MLPs as possible plays. DT Midstream , which is up 10% in 2026 and has a dividend yield of 2.7%, and Energy Transfer , up 13% in 2026 and yielding 7.2%. He also named Enterprise Products Partners , which yields 5.9% and is up nearly 16% year to date.
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