Keep tax time from becoming taxing

Start to think through how you might meet your potential tax obligations

13 Feb 2020

Key takeaways

  • Whether you have a pending quarterly tax bill or are planning ahead for April, it’s never too early to start to think through how you might meet your potential tax obligations.
  • If a higher-than-usual tax bill is causing you to examine how to meet your obligation without losing momentum as you pursue your investment goals, you have options.
  • Your Financial Advisor can help you determine borrowing options that support your short-term liquidity needs and your long-term financial plan.

Whether you have a pending quarterly tax bill or are planning ahead for April, it’s never too early to start to think through how you might meet your potential tax obligations. If you find yourself faced with a larger-than-expected tax bill, the question may not just be how to meet a potential obligation, but how to do so without compromising your longer-term financial objectives.

A number of scenarios may bring about a substantial tax bill, including:

  • Sale of a business
  • Liquidation of a large stock position
  • A larger-than-usual bonus
  • Substantial profit from a real estate sale

Understanding the opportunity cost

If a higher-than-usual tax bill is causing you to examine how to meet your obligation without losing momentum as you pursue your investment goals, you have options.

If you have cash reserves on hand, you may be able to pay your tax bill with those funds, but doing so could deplete your liquid reserves. A recent report from the UBS Chief Investment Office (CIO), How much cash is too much? (PDF), may help you determine the correct amount of reserves to hold based on your investment approach.

You may consider liquidating assets to fund your tax expense. However, you should be aware of the potential that liquidating assets could trigger a tax event * and may have an even broader-reaching impact if you exit the market at an inopportune time (see also the CIO paper on 10 reasons to stay invested (PDF), which examines the opportunity cost of being out of the market).

You may also be able to leverage a securities-backed line of credit, which may offer you the financial flexibility you need to meet your tax obligation, using your eligible assets as collateral.

Although borrowing is an “expense,” it may allow you to stay invested and keep your portfolio ready for potential market growth.

For example: Clients who borrowed $500k at an interest rate of 3.25% to pay a tax bill on April 1, 2019, instead of selling their US equities to raise the funds, would have paid $12.4k in interest expense in 2019. However, those clients would have kept their equity exposure and experienced $71.2k in market appreciation on those assets. **, †

Borrowing against securities has risks, especially during market volatility, so speak to your Financial Advisor about:

  • Whether borrowing against your securities is suitable based on your investment objectives and risk profile.
  • The purpose and time horizon of the loan and source of repayment.
  • Composition of collateral being pledged and potential market scenarios, particularly if investment collateral is concentrated.
  • Cushion in case of continued volatility and depreciation of pledged assets. The CIO report How much can I afford to borrow? (PDF) may help with this discussion.

Your Financial Advisor can help you determine borrowing options that support your short-term liquidity needs and your long-term financial plan.


Connect with your UBS Financial Advisor

To discuss how your tax strategy can support your larger financial goals.