Make These Investing Moves Now for a Better Tax Day in 2025

Sheryl Rowling, editorial director for financial advice for Morningstar Inc, talks about four strategies to practice tax-efficient investing all year. Morningstar Sustainalytics’ director of stewardship Jackie Cook discusses three climate change resolutions this proxy-voting season, including one on Bank of America’s ballot.

Tesla Appears It’s Focusing on Profits

JPMorgan Chase Keeps Outlook Steady

Climate Change Resolutions During Proxy-Voting Season

Tax-Efficient Investing: 4 Moves to Make Now

Read about topics from this episode.

Tesla: Staff Reduction Confirms Our View of Focus on Profits In 2024

JPMorgan Earnings: Bumper Profits Driven by Strong Net Interest Income and Trading Revenue

4 Climate Votes That Matter in This Year’s Proxy-Voting Season

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The 4% Retirement Rule is Just a Starting Point

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Ivanna Hampton

Jackie Cook

Sheryl Rowling

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Ivanna Hampton: Here’s what’s ahead on this week’s Investing Insights. Preparing for the next tax season starts now.Morningstar Inc’s editorial director for financial advice, Sheryl Rowling, shares four tips to become a tax-efficient investor. Plus, JPMorgan Chase is staying steady. Tesla is scaling back. What Morningstar analysts think about both companies’ outlooks and their stocks.And – Climate change is on the proxy ballot. Details on the demand facing Bank of America and what it wants shareholders to do.This is Investing Insights.

Welcome to Investing Insights. I’m your host, Ivanna Hampton.

Let’s get started with a look at the Morningstar headlines.

Tesla is planning to lay off more than 10-percent of its workforce, according to news reports.

And at least one high-level executive is leaving.

Morningstar believes the cuts are consistent with the EV maker’s shift toward profits instead of delivery growth in 2024.

Tesla has previously hired workers during expansion or cut staff during slowdowns.

It will likely reduce costs this year to maximize profits following a drop in first-quarter deliveries.

The aim appears to be to stabilize gross profit margins in the automotive segment and improve operating profit margins across the company.

Morningstar thinks Tesla’s shares are worth $195 each and slightly undervalued.

Investors are encouraged to wait for the stock price to come down before buying.

JPMorgan Chase produced bumper profits in the firstquarter.

But it’s keeping a lid on its outlook for the year.

A $725 million one-time charge from the FDIC tied to last year’s banking crisis reduced its profits.

The big bank’s earnings per share would have come in at $4.63, an increase year-over-year.

JPMorgan left its forecast for net interest income and card charge-offs unchanged.

Net interest income or lending profits fell in the first quarter from the previous one.

The decline mostly matched Morningstar’s expectations.

JPMorgan is outearning its typical level of net interest income.

Morningstar cautions investors to avoid projecting the current amount into the future.

JPMorgan’s balance sheet is more asset-sensitive than other big banks.

It will likely experience more pressure on net interest margins as interest rates fall.

Morningstar estimates JPMorgan’s stock is worth $168 and slightly overvalued.

Hampton: We're in the phase of proxy season where it lines up with Earth Week. Many investors are voting on different climate change resolutions at companies' annual meetings. Morningstar Sustainalytics' Director of Stewardship, Jackie Cook, has identified a few proposals she believes matter. Welcome to the podcast, Jackie.

Jackie Cook: Thank you, Ivanna. Nice to be here.

Hampton: Let's start with what is proxy voting and why should shareholders participate?

Cook: So, proxy voting is the opportunity for shareholders to have a say in the corporate governance of the companies that they're invested in. And this gives them the right to vote at AGMs, and it also, in the US and in several developed markets, gives them the right to file shareholder resolutions. And this is when shareholders actually get to set the agenda on big issues, big corporate governance and societal issues, and put their resolutions alongside management's resolutions on the proxy ballots.

Hampton: Now, New York City pension funds have asked several big banks to provide financing details about the climate transition. A vote is upcoming at Bank of America. Can you break down what these shareholders want and what does the Bank of America think?

Cook: So, in this case, the shareholders are asking the bank to produce a clean energy finance ratio. And it's a metric, a quantitative metric, that they've asked six banks for. And this is New York City pension funds. They filed this resolution at six large banks. Three of the banks have already agreed to produce this transition of clean energy finance ratio. And the resolutions are being withdrawn. And for the other three banks, the resolution seems to be going to a vote.

What it basically asks for is for the banks to indicate how much financing they've put forward for clean energy versus how much financing is going to fossil fuels. The Bloomberg New Energy Finance has actually calculated this ratio and figured out that to be on track for a 1.5-degree world, this has to be something like 4 to 1 by 2030. And what they calculate, though, is that it's really only about 0.73 to 1 right now. So, Bank of America opposes this resolution because they feel that the methodology for calculating it isn't developed enough. And so, they're concerned about producing a metric that may not have a consistent underlying methodology from bank to bank. The proponents argue that there is a methodology, and that the methodology has been –parts of this methodology can be taken from the Partnership for Carbon Accounting Financials' methodology. And Bank of America is in fact a member of the Partnership for Carbon Accounting Financials, big banks that are working on methodologies for calculating finance emissions.

Hampton: So, Bank of America, since they oppose, they're telling shareholders to vote, no?

Cook: That's right.

Hampton: Now, a vote is coming up next month on whether DTE Energy should publish a climate transition plan to match the Paris Agreement's goal of limiting global warming. Why is DTE against the proposal and why do some shareholders think the energy company could make the transition work?

Cook: So, this is another climate transition risk resolution, which is about, is the business transitioning at a pace that will keep it financially viable in a decarbonized world. And this is as the world around you transitions, customers, regulations, technology. So, shareholders are really wanting to understand what is DTE doing to keep its own business viable, but also as a large, diversified energy utility, it's instrumental, it's critical to helping those dependent on its energy transition as well. In this case, the proponent is asking the company to disclose what its targets are for decarbonizing its downstream provision of natural gas to consumers, residential, industrial, commercial. What it's doing to electrify that downstream portion of its business.

So, the company's set targets on a lot of its emissions, its scope 1 and scope 2 emissions, and its upstream scope 3 emissions, but this is its downstream scope 3 emissions. And the targets that it has set for these are not aligned according to the proponent with the net zero transition. And so, the proponent is also asking the company to come up with more specific plans around how it plans to reduce its emissions in this portion of its business. The plans that it has right now, the proponent argues, are not convincing and that they're not based on available options, they're based on technologies that still have to be developed.

Hampton: Now, a majority of Jack in the Box shareholders voted in favor of the fast-food chain reporting their greenhouse gas emissions. What does this vote signal to investors and other companies?

Cook: So, this vote here is a very well targeted – or this resolution is very well targeted. It's asking the company to set targets and report its emissions. It was supported by 57% of shareholders. So that's a majority of shareholders where the board actually asked shareholders to vote against the resolution. It resonates – or it reminds one of a resolution that came to vote at this company in 2022, where 95% of shareholders opposed the board's recommendation to vote against a resolution that asked the company to come up with an accelerated plan for sustainable packaging. This is a board that clearly has not got the message that you've got to consult with shareholder proponents when they file the shareholder resolution. In this case, the shareholder resolution isn't even asking the company for scope 3 targets specifically. It's saying at the very least set targets on your scope 1 and scope 2 emissions. Those are the emissions generated by your restaurants and the energy that they consume. This is not even your supply chain emissions. And of course, so restaurant businesses significantly exposed to transition and physical risk across its full value chain, and peers, McDonald's for instance, are setting targets on the full scope of their emissions and disclosing these emissions. Whereas Jack in the Box is not disclosing its emissions. So, this is a company that's not showing shareholders that it's climate transition ready. It's not showing shareholders that it's responsive to previous votes. And this is a big governance red flag, if nothing else.

Hampton: Well, Jackie, thank you for sharing your insights about proxy season.

Cook: My pleasure.

Hampton: You or your accountant have filed your taxes. Did you wonder if there was a missed opportunity to soften the tax hit? We're going to discuss how to make investing more tax efficient. That's right, we're already looking ahead to the next Tax Day. Sheryl Rowling is a CPA and the Editorial Director for Financial Advice for Morningstar, Inc.

Welcome to the podcast, Cheryl.

Sheryl Rowling: Thank you so much.

Hampton: So, what are some common mistakes that can cause investors at tax time?

Rowling: Well, a lot of these mistakes are things that you could be doing better throughout the year. And really, I think we need to focus on those.

Hampton: So, let's start with asset location. Why is it important?

Rowling: Asset location sounds like it's really tough, but we need to start with the basics. When you invest, there's usually three pots of money you can put that money into, a regular investment account, a retirement account like an IRA or a 401(k) or Roth IRA. Those containers all have different tax treatments. And if we pay attention to the tax treatment of those containers, we can put specific types of investments in those accounts so that we save on taxes. So, your regular investment account, you pay tax when you get interest or dividends or when you make a sale. And when you make a sale, it's capital gains. So that's one kind of account. Your retirement account, you don't pay any tax at all while it's in the account. So, you get a deduction when you put it in. It grows tax-free in the account. And when you take the money out, it's all taxable as ordinary income. And then we have the opposite case of a Roth IRA, which is not taxable at all. So, you don't get a deduction when you put the money in, but it grows tax-free. And when you take the money out, you don't pay tax. So, there's no tax on the principal or the earnings.

So, if you think about that, you want to take advantage of those different types of accounts and how they're treated tax-wise. So, in your regular investment account, you want to put investments that are going to grow because you don't pay tax on it while it's growing. And then if you sell it, you pay capital gains tax. And that's about half of your ordinary tax. In your retirement accounts, you want to put income-type investments like bonds because bonds are going to produce interest. If you hold it in your regular account, you're going to pay tax on the interest every year. If you hold it in the IRA, you don't pay tax on the interest until you pull it out. And that's ordinary income, but it would have been ordinary income anyway. And the Roth IRA, since you're never going to pay tax, you want to put the highest growth investments in there to get the biggest bang for your buck. So, if you put high-growth assets into your IRA, eventually when you take it out, you're going to pay ordinary tax. But if you keep the growth assets in your taxable account, eventually when you take it out, you pay capital gains tax, which is half as much. So, putting growth assets in your IRA is like telling Uncle Sam you're okay with paying twice as much tax.

Hampton: And I'm sure no one wants to say that. So, another strategy is tax loss harvesting. How can this strategy help minimize taxes?

Rowling: Well, I call this a way of making lemonade out of lemon. When you look at your investments and you see that some of them have gone down in value, that's not a pleasant feeling, but you can make a tax benefit out of it. So, if you sell something at a loss, you can recognize the loss. That's a tax benefit. If you want to stay invested in whatever it is you bought, you can buy back right away as long as it's not exactly the same thing you sold. If you buy back right away after a loss into exactly what you sold, the IRS says you don't get to take the loss because you're really in the same position. But if you buy something that's really similar, you can take the loss, you're still invested, and you've created a tax benefit. So, something similar would be like if you have a large cap growth fund that's an index fund, maybe you buy a large cap growth fund that's actively managed, or you just buy a large cap blend fund. So, as long as you don't buy exactly what you sold, then you can stay invested and recognize the tax benefit.

Hampton: And when should a person do a Roth IRA conversion if they're hoping to save on taxes in the long run?

Rowling: Right. Well, there's two different times to think about Roth IRA. One is when you're young and you're in a low tax bracket. And if you're working for a company like Morningstar that offers a Roth 401(k), that's kind of the same thing as putting money into a Roth IRA. You don't get a deduction upfront, but if you're in a low tax bracket, it's not going to cost you very much, and then all that money is going to go to grow tax-free forever. If you're already in a position where you have large IRAs or 401(k)s that are going to be rolled into IRAs when you retire, the best time to think about it is in the year you retire, before you start taking required minimum distributions, and even before you start taking Social Security, again, if you're in a low tax bracket, you can say, I want to trade some of these IRA investments into Roth IRAs. And you have to pay tax on it when you make that conversion. But again, if you're in a low tax bracket, it's not going to cost you very much and you're going to get the advantage of all that future growth tax-free forever.

Hampton: So, knowing at which stage of life you're in can help you on that one.

Rowling: Yeah. And also, how much you're making and if you're in a low tax bracket.

Hampton: And how can people who donate to charity also minimize their taxes?

Rowling: Okay. That's a good question. In order to deduct what you give to charity, you have to be in the category of itemizing deductions. So, if you take the standard deduction, you're not going to get a benefit. But if you know that you're itemizing, then giving to charity can be a really great write-off. And you don't have to just give money. You can give stuff like your old clothes and things like that, as long as you track exactly what it is and put a reasonable value on it. You can also contribute shares of stock or mutual funds. And the great thing about that is you get a deduction for the full fair market value, but you don't pay tax on the gain. So, it's kind of a double benefit. If you have a charity where you're giving significant dollars to like your church or to the American Cancer Society, they will have the ability to take shares and you'll get, again, another bigger bang for your buck.

Hampton: Well, Sheryl, thank you for your time and insights today.

Rowling: Oh, it's been fun. Thank you.

Hampton: That wraps up this week’s episode.

Thanks for listening.

If you enjoy hearing market trends and analyst insights on our podcast, feel free to leave a five-star review on Apple Podcasts.

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Thanks to senior video producer, Jake VanKersen, lead technical producer, Scott Halver, and associate multimedia editor, Jessica Bebel.

I’m Ivanna Hampton, lead multimedia editor at Morningstar.

Take care.