Tax Planning in Turbulent Time Part 3: Tax-Wise Financial Planning

In our last two pieces, we covered some tools of the tax-planning trade, as well as how to deploy them for tax-efficient investing.

But tax planning isn’t just for your investments. Life happens. Often, we cannot predict its next moves. But we can weave each event into the tax-planning fabric of your financial life.

Following, are just a few life events you may encounter over time. Each can translate into tax-planning challenges and opportunities:

Events Tax-Planning Possibilities
You get a job. Enroll in and max out contributions to any tax-sheltered accounts such as a 401(k), 403(b), 457, or Health Savings Account (HSA).
You buy a home and start a family. Score extra tax deductions; use the savings to pay down college debt, contribute to an IRA, and/or establish a 529 plan account for your child and Flexible Spending Account (FSA)
You receive an executive compensation package.

 

Work with a Certified Financial Planner® or tax professional to determine how and when to exercise your options for maximum tax-efficiency.
You receive a financial windfall, such as an inheritance. Allocate a significant portion of any new wealth to tax-sheltered retirement accounts. (Ditto for those executive compensation benefits.) Seek a Certified Financial Planner® to offset taxable gains with any available losses.
You sell your first home and buy a bigger one. Keep an eye on any gains from the sale. With some caveats, the Taxpayer Relief Act of 1997 says you can exclude up to $500,000 of the gain as a joint filer ($250,000 for single filers).
You get a pay raise. Maximize all of our employer benefits and retirement plans. You may consider contributing to a Back Door Roth if your income exceeds Roth exemptions.
You transition to a new, lower-paying career, take a leave of absence from work, or incur a financial setback. If your annual income is taking a temporary hit, consider leveraging the lower tax bracket to reduce your lifetime taxes by harvesting capital gains or performing a Roth conversion.
You buy a business. Engage a tax-wise Certified Financial Planner® to facilitate the acquisition.
You send your 18-year-old to college. Time to tap their tax-sheltered 529 plan. Adjusting your income levels through practical tax planning may also help secure a more favorable student aid package.
Your 18-year-old decides against college after all. Consider redirecting their 529 savings to a different beneficiary, or withdrawing the assets and paying tax + 10% penalty on the earnings if the account didn’t perform very well.
You sell a business. Ideally, your succession plan has been in place for years prior, to position your business for a tax-efficient transfer. Targeted insurance may also help cover taxes without placing an undue burden on you, your partners, or your successors.
You retire. Seek advice from a Certified Financial Planner® on how and when to take Social Security and any pension benefits available, as well as how and when to tap your taxable and tax-sheltered accounts. Once again, during low-income years, you may also plan to engage in some tax-gain harvesting, to reduce your overall tax basis.
You downsize to smaller home. Again, mind your capital gains, as described above. If you’ve lived in the home for at least 2 years, you should again be able to exclude gains of up to $250,000/$500,000 per single/joint filer.
You decide to work part-time in retirement. Good for you! But do some tax projections to determine how the extra income may impact your tax rates, benefits, and bottom line, while maximizing your retirement plan.
You are charitably inclined. Even with the 2017 Tax Cuts and Jobs Act tax code changes, tax breaks remain for the philanthropically minded. For example, you can use well-timed giving to offset unusual taxable events, such as setting up a Donor-Advised Fund in the same year you exercise a taxable stock option, sell a highly appreciated asset, or incur other significant deductible expenses.
You incur significant healthcare costs. Speaking of deductible expenses, you may be able to bundle high-priced elective procedures into a single year, to take more than your standard deduction that year (especially if you pair it with bundled charitable giving). Or, if you’re not seeking a higher deduction, this may be a good time to tap tax-free assets in your HSA.
You prepare to pass your wealth on to heirs or other beneficiaries. The taxable implications of estate planning are extensive, and best addressed with a Certified Financial Planner® and estate planning attorney. Especially since the 2020 SECURE Act eliminated the stretch IRA, you may also want to assess whether you’d rather prioritize reducing your own lifetime taxes or those of your heirs, and proceed accordingly.

The Big Picture

The above scenarios represent only a handful of the tax-planning events you might encounter throughout your life. Whether you’re building, preserving, or spending your wealth, tax-planning remains integral every step of the way. Each financial move you make can and should be leveraged for tax efficiencies as described. Better still, a seasoned Certified Financial Planner® can combine these parts into an integrated whole as you pursue lifelong tax efficiency.

Put another way, ideal tax planning integrates seamlessly with all your greater financial plans. This can get complicated—like a juggling act, in which we must keep an eye on each item as well as the big-picture results.

Could you use an experienced hand to keep your total wealth at play? We’re here to help!

 

The information contained this newsletter is intended for the use for education purposes only.  Dissemination, distribution or copying of this message is strictly prohibited. This information should not be construed as investment, tax or legal advice and may not be relied on for such purpose.  Fischer Investment Strategies, LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.  This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such.  If you are interested in working with us, please contact us at (805) 418-7686.

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