Taxes in Focus: The BEAT Q1’26

Transcript

To many, tax day can feel like the finish line, and certainly for tax preparers, it is. But for advisors, I’d argue it could be a starting line. Clients are finally seeing the full picture from last year. They know what they earned, what they realized, and most importantly, what they paid. This gives us an opportunity to look at what created the tax friction within their portfolio.

Now, to be clear, before we jump into my segment, I’m not suggesting that advisors need to become tax professionals or forensic accountants. Simply, that you should be comfortable looking under the hood of the tax forms that a client receives, just enough to spot patterns, stress points, and lead into better planning conversations.

It allows for you to be proactive rather than reactive. So before a client poses a question like, “Why was my tax bill so high?” Or, “Where did all of these capital gains come from?” Or, “Is there something that we could have done differently?” You get to be the catalyst of that conversation. So let’s take a look at this slide here.

This is simply meant to level set what ultimately feeds a client’s tax return. They’ll receive a lot of different tax forms, and this is just a quick overview of some of the most common. You have your 1099-DIV for dividends, your 1099-INT for interest income, your Schedule K-1s from partnerships, and importantly, the one we’ll look at today is form 1099-B, which reports capital gains and losses.

Now, all of these forms roll up and provide you the output of form 1040, which determines whether a client owes money or receives a refund. So let’s jump forward to the next slide. The key planning insight here is that not all income is created equal. The character of income, whether it’s ordinary, short-term, long-term, all has a direct impact on what a client ultimately pays upon filing.

So when a client had a painful year last year, it’s not random. The explanation is sitting somewhere in these inputs. This is why being comfortable scanning these forms can help you move beyond, “Taxes were high,” and move into, “Why were taxes high?” And that ultimately will lead into, “What could we have done about it?”

So let’s jump to our next slide, let’s spend a minute on that form 1099-B. We’ll use it as a great example. This form provides a summary of proceeds versus cost basis. It then summarizes adjustments in disallowed losses, so this would be wash sales. Next, it provides holding period and character. So if a client is looking at their tax return and sees a meaningful realized gain, this is the form that is going to tell us, was that a short-term gain?

Was it long-term in nature? Did we have any harvested losses that actually helped negate some of the consequence of that gain? And that’s where the planning conversation can start. If the client realized a large amount of gains and had very few losses to offset them, that’s a signal that the portfolio wasn’t structured to systematically create tax assets.

That might allow you to share an insight such as the following, “Based on what showed up here last year, incorporating a systematic and opportunistic tax loss harvesting approach could materially improve our outcomes moving forward.” For many clients, that conversation naturally leads to a solution like direct indexing, for example So let’s jump forward to our next slide.

Once you identify the issue, the next step is helping clients understand the impact. We offer a great online tool called our Investment Tax Calculator. Go to your search engine of choice and type in Eaton Vance Investment Tax Calculator. It will bring to life taxes for your clients. It allows for you to showcase the tax rates that they are actually subject to based on their state of residency, as well as a, a multitude of other factors.

It also illustrates the different types of gains and how they are taxed, and how that translates into what they paid last year. For many clients, seeing those rates is not only eye-opening, but it reinforces why tax-aware investing matters just as much as how much they made in their pre-tax returns within their portfolio.

So now let me close with one encouraging point, especially given recent markets. Despite, despite the headlines, the volatility we saw in Q1 actually created a silver lining for tax-aware investors. Across all equity asset classes, large cap, mid cap, small cap, developed international, emerging markets, we saw a peak-to-trough drawdown north of 8% across the board.

So what does that mean? That means that no matter where you had potentially plugged in direct indexing within a client’s asset allocation, there was opportunity. That short-term volatility created value in the form of tax savings, and even if the long-term market direction remains constructive, the opportunity for loss harvesting is systemically present.

So volatility doesn’t just mean risk, it can also mean tax opportunity if the portfolio is intentionally designed to capture it. So this is just one example of a planning opportunity that can arise from a thoughtful review of last year’s tax outcomes. So in summary, my key takeaway for this quarter is use tax day to take a look in the rear view mirror, and then use those insights to recalibrate client portfolios for what comes next.