Tip your server, not the IRS. – Stephen Jarvis, CPA
If I were to ask you what you think are the biggest expenses a person has over his or her lifetime, what would you say? Most people would probably respond with buying a house, paying for college, or expenses related to healthcare – and they wouldn’t be wrong. Those are indeed some of life’s biggest expenses. But many people forget that taxes are also one of the most significant expenses over our lifetimes.
Taxes affect almost every aspect of personal finances, including spending, saving, investing, insurance, giving, and estate planning. They are, quite literally, from cradle to grave. From the child tax credit to the estate tax, there’s a reason why Ben Franklin’s quote, “Nothing is certain except death and taxes,” still rings true today.
Preparation vs. Planning
Virtually every adult in America is acutely familiar with ‘tax season’ – the mad rush every April to prepare and file their taxes (or an extension). Tax preparation is the process of organizing and filing your tax return. Whether you use software or hire a CPA, peace of mind certainly comes with knowing your taxes are filed accurately and correctly.
It is common during ‘tax season’ for everyone to be focused on ensuring compliance with the tax laws and making sure they take advantage of the common deductions and credits that they are eligible for. But really, by the time the annual filing date rolls around, your taxes are what they are.
While April is dedicated to tax preparation, many folks do not realize that the eleven other months of the year are open season for tax planning – thoughtfully minimizing your short-term and long-term taxes. Unlike tax preparers who often just look back twelve months, tax planners are looking forward years, if not decades, and making use of the tax law to pay the least amount of tax possible over a lifetime.
Tax Planning: A Proactive Approach
Tax planning is a strategic approach to minimizing your taxes over your lifetime or even down through generations. It can be as simple as understanding your tax bracket, being aware of how tax credits and deductions work, being opportunist about taking the standard deduction and itemizing, staying on top of your tax payments, or withholdings, and leveraging tax-advantaged accounts. But a more proactive approach couples tax planning with major decisions such as spending (tax credits), saving (choice of retirement vehicles), investing (asset location), insurance (business cross-purchase agreements), and estate planning (reducing property in a taxable estate).
An overarching concept in tax planning is that you want to pay a tax when you are in the lowest tax bracket. Hence, the power of a Roth IRA for a 20-something vs. a high earner in their 40s who would likely want to use tax-deductible accounts to reduce taxable income. From there, more advanced planning opportunities abound, from tax loss harvesting, monitoring year-end mutual fund capital gain distributions, avoiding/minimizing tax torpedoes such as social security taxation or Medicare Part B Premiums, and managing around long-term capital gain brackets.
Speaking of Roths, opportunistic Roth conversions are very popular with those who retire early, can take advantage of lower taxable rates and want to reduce Required Minimum Distributions (RMDs) in the future. Those who are at RMD age and are charitably inclined are sometimes surprised to hear that Qualified Charitable Distributions (QCDs) can be done in lieu of RMDs. Speaking of the charitably inclined, the days of having to have a private foundation to give with timing and precision are long gone with the proliferation of Donar Advised Funds.
We haven’t even talked about retirement plans for the self-employed or business owners, which can allow owners to supercharge savings in a tax-efficient way or employee stock compensation tax strategies. Active and passive real estate investing also has tax opportunities not available in other types of investing. Another notable aspect of the tax planning software is the ability to do scenario analysis around potential tax changes in the future, such as the sunsetting of the 2017 TJCA that sunsets in 2026.
The Integration of Tax Preparation and Tax Planning
Since the tax preparer and tax planner often have two mutually exclusive goals – the tax preparer most often seeks to minimize taxes in the current year, and the tax planner is to reduce taxes over your lifetime. This is an area where a good financial planner will shine as the quarterback between the client and the tax preparer (and often the estate planner as well, where there are tax implications).
So that nothing is lost in communication between the client and the tax preparer, an excellent financial planner will communicate the proactive tax planning that has been done during the past year to the tax preparer. This is best accomplished via a tax letter from the financial planner, highlighting important and often missed details such as a list of expected tax documents, qualified charitable deductions, or Roth conversions, to name a few.
Conclusion
Walnut Hill Wealth Management clients enjoy personalized tax planning, from basic to advanced, using the state-of-the-art tax planning software Holistiplan. This allows us to complete a thorough review of your tax returns in a fraction of the time. Once we have our arms around your tax history via key figures and planning opportunities available, we can create a baseline for future projection scenarios, discover errors in past tax returns (yes, that happens), and coordinate communication with your CPA or preferred tax preparer. WHWM is here to help you identify your priorities, develop a plan, and adjust along the way. Putting your trust in WHWM means working with WHWM’s Founder and President, Stephen Bodwell, CPA and a CFP® professional committed to helping you achieve your financial goals and big dreams. Take the next step towards getting what you want in life. Schedule your complimentary, no-obligation 30-minute consultation today.
Walnut Hill Wealth Management, LLC (“WHWM”) is a registered investment advisor offering advisory services in the State of Texas and in other jurisdictions where exempt. The information provided is as of the date indicated and is subject to change.
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