Time is running out for some of the money-saving provisions in the tax code, and now is a good time to build your portfolio and minimize taxes, according to Bank of America. The Tax Cuts and Jobs Act (TCJA), which took effect in early 2018, overhauled the federal tax code. It roughly doubled the standard deduction, adjusted individual income tax brackets, cut most rates and imposed a $10,000 cap on state and local tax deductions. If Congress doesn’t act, some provisions in the law will expire at the end of 2025, which could hurt taxpayers. “The expiration of the TCJA could mark the largest tax increase in history, worth $4.6 (trillion),” wrote Jared Woodard, an investment and ETF strategist at Bank of America, noting that the aggregate tax burden on US households would rise by $2 trillion in five the next. year. “In some estimates, the top fifth of households could pay 2-6% more of their income in taxes,” he said. With that background in mind, Woodard gives investors a few steps to help prepare their portfolios for a higher tax climate. Stick with tax-efficient ETFs In general, exchange-traded funds are more tax-efficient than their mutual fund counterparts. Mutual funds tend to have higher turnover – that is, buying and selling of underlying securities – and by law must distribute capital gains. Investors in mutual funds don’t have to sell shares to be taxable: Fund managers who sell some of their holdings to take a profit or cash out investors who leave, for example, have capital gains and must distribute them. to the shareholders. “For the same investment, the taxable event means that the fund costs investors 1.3% per year vs. just 0.4% for ETFs,” Woodard said. He added that an investor who put $100,000 into the S&P 500 ETF in October 2013 and has continued to date would have made $359,000. That compares to a balance of $316,000 if it were an S&P 500 mutual fund. Think of dividend-paying stocks vs. bonds. Stocks that spin off qualified income dividends can also be tax-friendly for investors to keep in a brokerage account. Qualified dividends are subject to a 0%, 15% or 20% tax rate, depending on the investor’s taxable income. Interest income from bonds, on the other hand, is generally taxed at the same rate as ordinary income – which can be as high as 37%. Note that this treatment is different for municipal bonds, which are tax-free on a federal basis and may be exempt from state levy if the investor resides in the issuing state. Meanwhile, income from Treasurys is subject to federal income tax, but exempt from state and local taxes. Investors should remember that tax considerations are only one factor in considering a portfolio. That is, the tax-friendly aspect of dividends will not lead you to acquire stocks if your appetite for risk and your goal is to show bonds would be a better choice. Looking for tax-efficient opportunities for your holdings Look at your portfolio and see if there are opportunities for tax-advantaged returns, Woodard said. “Many ETFs take advantage of (qualified dividend income) and return of capital for tax efficient distribution,” he wrote. For income-seeking investors, the strategist cites high-yield municipal bonds, which “offer a 6-7% tax-adjusted basis, 350 bps more than the US aggregate bond index.” Funds in the spotlight include the SPDR Nuveen Bloomberg High Yield Municipal Bond ETF (HYMB), which has an expense ratio of 0.35% and a 30-day SEC yield of 4.32%. VanEck High Yield Muni ETF (HYD) has an expense ratio of 0.32% and a 30-day SEC yield of 4.16%. Woodard also mentioned the master limited partnership. This instrument trades like a stock, but benefits from a partnership structure, as income distribution is not subject to corporate tax. That produces a higher yield. For ETF plays, the strategist highlighted the Global X MLP & Energy Infrastructure ETF (MLPX) and the Global X MLP ETF (MLPA). Both offers have an expense ratio of 0.45%. MLPX has a year-over-year total return of approximately 34%, while MLPA has a total return of over 14%.