John and Jane's Taxable Portfolio: A 2025 Review and 2026 Tax-Efficient Plan

Let's start with the numbers. For the year, our portfolio delivered a solid 14.44% return. That's a strong performance, especially when you consider the broader market. The US stock market itself rose about 18% in 2025. Our newer stock holdings-AVUV and DFSV-also did well, returning 13.63%. So, on paper, we were in a good place.

What likely gave us an extra boost was our international exposure. With the dollar weakening, international stocks typically do better for dollar-based investors. Our allocation to the Total International Stock Market probably outperformed the US market that year, adding to our gains.

Yet here's the critical point: despite these solid returns, a significant portion of that profit was likely eaten away by taxes. This is the hidden cost of a taxable account. The gains we made, especially from short-term trades or taxable bond income, were subject to ordinary income tax rates that can top out at 37%. In contrast, long-term capital gains are taxed at more favorable rates, up to 20% for high earners. The difference is stark.

The setup for 2026 is clear. We had a good year, but we also had a tax bill. This isn't about being upset with the returns; it's about recognizing that taxes are a real, ongoing expense that can quietly erode your wealth. The goal now shifts from just chasing returns to chasing after-tax returns. We need a plan that works smarter with the tax code, not against it. The foundation for that plan starts with understanding exactly where the tax drag happened last year.

The 2026 Tax Landscape: What's Changed and What to Watch

The rules for your money are shifting, and 2026 demands a new playbook. The good news is that the capital gains tax rates are locked in for the year. Long-term gains, from assets held over a year, will be taxed at a maximum of 15% or 20% for high earners. That's a clear, predictable rate. The bad news is that the alternative-short-term gains from trades held less than a year-are taxed at ordinary income rates that can hit 37%. This gap between rates is the core of the tax game now. At the same time, the market is changing the income picture. Central banks have already begun cutting rates, and the result is that money-market yields are falling. For anyone relying on cash or ultra-safe bonds for income, this means that easy, high-yield parking spot is disappearing. This isn't just a minor tweak; it's a fundamental shift. It creates a key moment to consider moving toward more durable sources of income, like dividend-paying stocks or diversified bond funds, before yields fall further.

The IRS has also set the calendar. The 2026 tax filing season will begin on January 26. That's just a week away. This timing frames the entire year. It means the window for strategic year-end moves is closing fast, but it also means we have a clear target for planning.

Put these pieces together, and the focus for 2026 becomes active. With capital gains rates stable, the biggest opportunity isn't in guessing tax law changes-it's in managing your portfolio's tax character. This is the year for disciplined tax-loss harvesting to offset gains, especially those high-taxed short-term ones. It's also the year to think harder about strategic asset placement, moving income-generating assets into tax-advantaged accounts where they can grow without annual tax bills. The goal is simple: make every dollar work harder after taxes.

Building a Tax-Efficient Action Plan for 2026

The review and outlook point us toward a clear, actionable plan. The goal is to systematically reduce the tax drag on our portfolio, turning that 14.44% return into a higher after-tax return. Let's break it down into three key steps.

First, we need to audit our asset location-the "financial buckets" where we hold different types of investments. The basic rule is simple: shelter income and growth from immediate tax bills. That means placing income-generating assets like bonds and dividend stocks in tax-deferred accounts (like IRAs or 401(k)s). These accounts let the earnings grow without annual tax bills, compounding over time. Conversely, high-growth assets like stocks are often better placed in Roth accounts, where they can grow tax-free for withdrawals later. This isn't just theory; Vanguard's research shows that building portfolios with real-world taxes in mind can help investors keep more of what they earn. The key is to ensure our stocks and bonds are in the right accounts to minimize tax drag from the start.

Second, we must schedule a year-end check to actively manage our gains and losses. This is where tax-loss harvesting comes in. The strategy is straightforward: sell investments that have declined in value, use those losses to offset any gains we've realized, and then immediately replace them with similar holdings to stay invested. The IRS allows us to use up to $3,000 a year to offset ordinary income if we have more losses than gains. This is a powerful tool, but its impact is greatest when used to offset higher-taxed short-term gains first. Remember, short-term gains are taxed at ordinary income rates up to 37%, while long-term gains are capped at 15% or 20%. By harvesting losses to offset those high-taxed short-term profits, we effectively lower the tax bill on our biggest gains. The OBBBA preserves these rates for 2026, making this a predictable and valuable opportunity.

Finally, we should consider the strategic placement of assets within taxable accounts themselves. The old rule was to avoid taxable bonds entirely, favoring tax-exempt municipal bonds. But Vanguard's new research challenges that default. It shows that a deliberate allocation to taxable bonds-like Treasuries and investment-grade credit-can actually improve after-tax results for many investors, especially those with more modest incomes. This approach preserves diversification and reduces concentration risk better than an all-muni portfolio. In other words, the most tax-efficient move isn't always the simplest. It's about finding the right mix for your specific situation.

The bottom line is that tax efficiency is a foundational strategy, not a one-time fix. By reviewing our asset location, scheduling a disciplined year-end loss harvest, and thoughtfully placing bonds in taxable accounts, we can systematically reduce our tax burden. This plan works with the 2026 tax landscape, turning a predictable rate structure into a tangible advantage for our portfolio.

Catalysts and Risks: What to Watch in 2026

The tax-efficient plan we've outlined is a solid foundation, but its success hinges on a few key catalysts and risks. The most immediate catalyst is the year-end tax planning window. This period offers a final, meaningful opportunity to manage your capital gains and losses before the new tax year begins. As the evidence notes, investors can manage sales of assets at year-end to maximize tax benefits. This is the moment to harvest losses to offset gains, especially those high-taxed short-term profits, and to strategically realize gains that can be absorbed by losses. Missing this window means leaving money on the table to taxes.

The primary risk is simply failing to act. If we do nothing, we forfeit the potential for a tangible after-tax return boost. Research shows that a tax-aware portfolio can increase after-tax returns by approximately 0.35% per year. That may seem small, but over decades, it compounds into a significant difference in retirement savings. More broadly, the risk is overcomplicating the plan. The most effective tax strategies are often the simplest: consistent, disciplined tax-loss harvesting and getting the basic asset placement right. As Vanguard's analysis cautions, a straightforward strategy of simply replacing traditional fixed income with municipal bonds is not optimal and can forgo much of the potential benefit. The goal is a thoughtful, customized approach, not a rigid checklist.

Another subtle risk is the "wash sale rule." This IRS rule disallows a loss if you repurchase substantially identical securities within 30 days of the sale. The evidence warns to watch out for the wash sale rule and suggests waiting at least 31 days to reacquire similar holdings. This is a common pitfall that can undermine a loss harvest. Finally, the risk of inaction extends beyond the year-end window. The plan's benefits are realized over time, not just in a single move. Consistent application of these principles throughout 2026-reviewing account placements, managing sales, and staying aware of the tax landscape-will determine whether we achieve that steady, compounding advantage.