That was one retired client’s entire 2025 federal income tax bill.
Two years ago, they came to us with roughly $7 million invested and one of the largest tax bills they’d ever faced.
Their income comes from:
• Rental property
• Social Security
• Required Minimum Distributions (RMDs)
• A small W-2 salary
We coordinated their investments, tax planning, charitable giving, and retirement strategy so each piece supported the others.
Here’s how we approached it.
1. Clean up the taxable portfolio
When we first started working together, the portfolio was roughly 80% public equities, with taxable bonds and tax-inefficient hedge funds making up most of the remainder. They had also recently realized more than $350,000 of capital gains.
The first priority was reducing the portfolio’s dependence on public equities without creating another massive tax bill.
We implemented a tax-aware long/short SMA that has now harvested over $1m of capital losses while continuing to provide broad global equity exposure plus alpha from the long/short overlay.
Those harvested losses have allowed us to rebalance into other asset classes like hedge funds and real estate without the tax friction that normally comes with selling appreciated securities.
In my opinion, being able to reduce equity concentration without creating a tax bill is one of the biggest advantages of tax-aware investing.
2. Create income shields
Next, we wanted to diversify the portfolio’s return sources while reducing taxable income.
We added tax-aware hedge funds that have created uncorrelated returns while realizing ordinary deductions along the way.
Those deductions are helping offset income from:
• Their small W-2 salary (which we route to Roth 401k)
• Social Security
• Required minimum distributions (RMDs)
• Roth conversions
The client also owns a rental property with no debt so the cash flow is larger than the straight-line depreciation, resulting in taxable income.
Rather than immediately paying for a cost segregation study on that property, we were able to use excess depreciation generated from professionally managed real estate investments elsewhere in the portfolio to offset that rental income.
The result is a portfolio where multiple investments work together rather than independently.
In fact, one of the more interesting outcomes is that if we weren’t intentionally doing Roth conversions each year, they would have very little taxable income left. The tax-aware hedge funds and real estate are already offsetting most of their income.
3. Coordinate charitable giving
The client is extremely charitable.
Rather than continuing to write dozens of individual checks every year, we established a Donor Advised Fund (DAF).
Each year we contribute some of their lowest-cost-basis appreciated securities directly into the DAF. What’s nice about a tax-aware long/short SMA is we’ll always hold some of the top performing stocks in the market.
Because they itemize their deductions, those charitable deductions help offset income we’re intentionally recognizing through Roth conversions while also eliminating the embedded capital gains on the donated shares.
Operationally, they also love how much simpler their charitable giving has become.
4. Build a Roth “opportunity bucket”
Finally, we’ve been strategically converting portions of their traditional IRA to Roth each year.
Inside the Roth accounts we’ve prioritized private equity because those investments generally have the greatest long-term compounding potential.
Today, roughly $250,000 of private equity sits inside a Roth IRA.
The portfolio includes exposure to hundreds of private companies through diversified funds, including businesses such as OpenAI, Anthropic, Stripe, Anduril, Nobu, QTS, AirTrunk, and many others.
For someone who spent their career above the Roth contribution income limits, it’s pretty exciting for them to see meaningful private market exposure building inside a tax-free account.
The bigger lesson
Each of these strategies are compelling on their own, but the greatest value comes from coordinating them.
The tax-loss harvesting creates flexibility to rebalance.
The hedge funds diversify and realize deductions that help offset income.
The real estate offsets other passive income.
The charitable giving is coordinated with Roth conversions.
The Roth conversions prioritize the assets with the highest expected long-term growth.
Every piece supports another piece.
That’s what tax-aware wealth management looks like.
Too often, financial planning, investment management, tax planning, charitable giving, and estate planning happen in silos.
The biggest opportunities usually aren’t found within any one strategy.
They’re found in how those strategies work together.
This example is based on one client’s circumstances and is provided for educational purposes only and is not tax, legal, or investment advice. Every family’s situation is different, and outcomes will vary.
If you’re a family with $10 million or more that’s paying significant taxes and wants better coordination between investments, tax planning, and estate planning, send me a message and I’d be happy to walk you through what that could look like.