Tax Planning – What are the Benefits?

Taxes are your biggest expense. Tax Planning can help. A typical middle class tax payer may be in the 22% or 24% tax bracket, but Federal Income Taxes are only one piece of their total tax burden. They also pay 7.65% in Social Security and Medicare Taxes. If they’re self-employed, double that to 15.3%. Most of my clients here in Dallas pay $6,000 to $20,000 a year in property taxes, more if they also have a vacation home. After getting to pay taxes on their earnings, they are taxed another 8.25% when they spend money, through sales tax. 

High earners may pay a Federal rate of 35% or 37%, plus a Medicare surtax of 0.9% on earned income and 3.8% on investment income. There’s also capital gains tax of 15% or 20%. Business owners get to pay Franchise Tax and Unemployment Insurance to the state. Add it all up and your total tax bill is probably a third or more of your gross income.

I’m happy to pay my fair share. But I’m not looking to leave Uncle Sam a tip on top of what I owe, so I want make sure I don’t overpay. I help people with their investments, prepare to retire someday, and to make sure they don’t get killed on taxes. It’s vitally important.

The tax code is complex and changes frequently. We have talked about how the Tax Cuts and Jobs Act changes how you should approach tax deductions. This past month, I’ve been talking and writing about the new SECURE Act passed in December.

It’s February and people are receiving their W-2s and 1099s and starting to put together their 2019 tax returns. I like to look at my client tax returns. We can often find ways to help you reduce your tax burden and keep more of your hard-earned money, completely legally.

Two sets of eyes are better than one.

I’m not a tax preparer, and I don’t mean to suggest that your tax preparer is making mistakes. While I have, of course, seen a couple of errors over the years, they are rare. However, I think there is a benefit to having a second set of eyes on your tax return. I may look at things from a different perspective than your CPA or accountant. As a Certified Financial Planner professional and Chartered Financial Analyst, I have extensive training on Tax Planning and have been doing this for over 15 years.

Tax preparers are great at looking at the previous year and calculating what you owe. What I sometimes find is that they don’t always share proactive advice to help you reduce taxes going forward. 

For example, this month, I met with an individual and looked over his 2018 tax return. He would have qualified for the Savers Tax Credit but did not contribute to an IRA. I told him “your CPA probably mentioned this, but last year, if you had contributed $2,000 to a Roth IRA, you would have received a $1,000 Federal Tax Credit”. Nope, he had never heard about this from his long-time preparer, and let’s just say he was displeased. While his tax return was “correct”, it could have been better.

When you become a client of Good Life Wealth Management, I will review your tax return and look for strategies which could potentially save you a significant amount of money. Such as?

5 Areas of Tax Planning

1. Charitable Giving Strategies. It has become more difficult to itemize your deductions and get a tax savings for your charitable giving. We identify the most effective approach for your situation. For example, donating appreciated securities or bunching deductions into one year. If you’re 70 1/2, you could make QCDs from an IRA. Or we could front-load a Donor Advised Fund to take a deduction while you are in a higher tax bracket before retirement. If you are planning to make significant donations, I can help your money go father and have a bigger impact.

2. Tax-advantaged accounts: which accounts are you eligible for and will enable the greatest contribution? No one can tell without looking at your tax return. Let’s maximize your pre-tax contributions to company retirement plans, IRAs, Health Savings Accounts, and FSAs. Often someone thinks they are doing everything possible and we find an additional savings avenue for them or their spouse.

3. Investment Tax Optimization. Do you have a lot of interest income reported on Schedule B? Why are those bonds not in your IRA or retirement account?  Are your investments creating short-term gains in a taxable account? Do you have REITs which don’t qualify for the qualified dividend rate? You could benefit from Asset Location Optimization. 

Showing a lot of Capital Gains Distributions on Schedule D? Many Mutual Funds had huge distributions in 2019. Let’s look at Exchange Traded Funds which have little or no tax distributions until you sell. There may be more tax-efficient investments for your taxable accounts. Are you systematically harvesting losses annually?

4. If you make too much for a Roth IRA, are you a good candidate for a Backdoor Roth IRA?

5. Tax-Efficient Retirement Income. What is the most effective way to structure your withdrawals from retirement accounts and taxable accounts? When should you start pensions or Social Security? How can you minimize taxes in retirement?

I could go on about tax-exempt municipal bonds, tax-free 529 college savings plans, the Medicare surtax, or reducing taxes to your heirs. It’s a long list because almost every aspect of financial planning has a tax component to it. 

Most Advisors Aren’t Doing Tax Planning

Even though taxes are your biggest expense, a lot of financial advisors aren’t offering genuine tax planning. For some, it’s just not in their skill set, they only do investments. For a lot of national firms, management prohibits their advisors from offering tax advice for compliance reasons. Other “advisors” specialize in tax schemes which are designed primarily to sell you an insurance product for a commission. I’m in favor of the right tool for the job, but if you only sell hammers, every problem looks like a nail. 

Tax Planning is making sure that all the parts of your financial life are as tax-efficient as possible. If you’d like a review of your 2018 return before you complete your 2019 taxes, give me a call. I get a better understanding of a client’s situation by reviewing their taxes and I really enjoy digging into a tax return. 

While I can’t guarantee that we can save you a bunch of money on your taxes, we do often have ideas or suggestions to discuss with your tax preparer. That way you can participate more than just dropping off a pile of receipts. If you do your taxes yourself, as many do today, you can ask me “Are there any additional ways to reduce my taxes?” Let’s find out.