Now you can avoid taxes like the rich and famous

livemint.com:

Subscribe to enjoy similar stories. The buzzword on Wall Street is to “democratize" everything that was once exclusively for sophisticated investors, be it hedge-fund strategies, options trading or private markets. It was only a matter of time until the list included tax avoidance.

This is the time of year when legal ways to avoid paying income tax are top of mind. Income taxes are levied on interest from bonds and bank deposits, as well as on preferred dividends and the sale of investments for a gain. Qualified dividends and long-term capital gains get a lower rate.

Even if you receive cash from your fund and invest it right back, you owe the taxman. This creates funkiness in markets. The famous Santa Claus rally is likely the rebound from what is known as tax-loss harvesting in early December, when investors sell their unprofitable securities to offset broader gains in their portfolios.

If it seems like a lot of work for scant gain, think again: A 2020 paper estimated an extra annual return of 1.1% from tax-loss harvesting with U.S. blue-chip stocks. For someone investing $10,000 in a taxable brokerage account now, it could mean having $235,000 in 30 years’ time instead of $175,000.

The second approach is to defer tax payments as much as possible, allowing money to compound for longer. It is a crucial reason why the highest-income households often pay less tax than middle-class ones, according to the Tax Policy Center. To invest in the S&P 500, for example, the rich might eschew mutual funds and use direct indexing—that is, owning the stocks in the index individually so the underperforming ones can be disposed of even if the market does well.