When it comes to income, it’s not what you make, but what you keep after taxes that counts. And these days, with higher capital gains taxes and the 3.8% Medicare investment income surtax (which affects certain filing status thresholds), being mindful of investment taxes is more important than ever.

Returns lost to taxes
The Schwab Center for Financial Research examined the long-term impact of expenses and taxes on investment returns and concluded that while asset allocation and investment selection are still some of the most important factors affecting returns, minimizing costs and taxes isn’t very far behind.

Because mutual funds may distribute capital gains throughout the year, mutual fund investors are often concerned about losing investment returns to taxes. But, depending on how they manage their investments, individual stock and bond investors are vulnerable to taxes as well.

As disconcerting as a return lost to taxes might be, the good news is you can exercise a good deal of control here. For example, diversification and asset allocation are great tools that help reduce portfolio volatility. But despite how diligent we might be in setting up our portfolios and selecting our individual investments, we’re still going to be subjected to the short-term whims of the market. Our greatest degree of control is in the area of expenses and tax-efficient implementation. It makes sense, then, to bring tax-efficiency near the forefront of our investment plan.

How do I try to maximize tax efficiency?
Broadly speaking, investments that tend to lose less of their return to income taxes are good candidates for taxable accounts. Likewise, investments that lose more of their return to taxes could go in tax-advantaged accounts. Here’s where you might consider placing your investments: