Why is tax planning important?
That question is easy to answer - TO SAVE ON TAXES AND PRESERVE MY ASSETS. Unfortunately, most advisors don’t focus seriously on this. The reason? It’s hard and requires specialized skill and training.
No one wants to pay more taxes than they need to. Nor should they. However, without proper tax planning, opportunities to save on taxes are lost forever.
If your current advisor is not offering detailed tax planning, they are leaving out a major value component for their clients – one that could preserve major portions of their wealth for themselves and future generations. How can you tell if your advisor is doing the job they should be doing? There are many clues, but one of the most obvious is whether or not you have a financial plan. Without one, your advisor is missing key components on which to even build a comprehensive tax planning strategy.
What are the goals of tax planning?
Unlike the conventional wisdom regarding the need to mindlessly defer taxes, the goal of tax planning is be reduce one’s lifetime tax bill. Saving taxes one year, only to pay more taxes in future years as a result, can be called tax planning - very poor tax planning. Unfortunately, this is often the most common advice that "tax planners" provide. Frankly, most tax preparers do not have or develop sufficient information to project future income streams and tax rates. Fortunately, good financial advisors, those that maintain financial plans, do have the information needed to do tax planning, with the basics needed to even extend that tax planning to include the next generation.
What is included in tax planning?
There are many tax savings vehicles available, these include:
- Roth Conversions
- Back-Door Roth IRAs
- Comparing a Roth IRA to a Traditional IRA
- Qualified Charitable Distributions
- Donor Advised Funds
- Tax-loss trading
- Capital gain harvesting
- Health Savings Accounts
- Municipal bonds
- Distribution planning – including staging techniques during asset accumulation
How Low Can You Go? Pay Attention to Current and Future Tax Rates
Consider three future tax rates as compared to your current rate:
- Compare the current tax rate to the future tax rate in retirement.
- Compare the current tax rate to the future tax rate once the Widow’s Penalty kicks in (Married Filing Jointly to Single).
- Compare the current tax rate to the potential heir’s tax rate.
Paying some taxes now could be a missed opportunity, especially when tax rates are expected to increase in future.
America’s Marginal Tax Rate Is at a Historic Low
Examine the chart below while keeping in mind that the U.S. deficit has been growing at an alarming rate. It is hard to imagine that tax rates will not be going up in the future.
HISTORIC HIGHEST MARGINAL INCOME TAX RATES IN THE U.S.*
Tax Law Is Permanently in Flux
Though taxes are certain, tax law is not: Congress is fickle, and changes its mind constantly. Every four years, a new president and/or a new party brings a new tax plan with major tax proposals. Presidential candidates’ plans have included changes to some or all the following: Income tax rates and brackets; capital gains rates; dividends and interest income; exemptions, deductions, and credits; payroll tax; corporate taxes; estate taxes; and so on. Unfortunately, tax planning needs to be constantly updated to stay up with these continuous stream of changes.
We can help.
At Fullen Financial we believe that tax planning is not an option, it is a requirement. We have been tax planners for years and we are constantly upgrading and improving our tax planning skills. If you believe as we do, that tax planning is not optional, let’s talk. There is no need to go at this alone.
Taylor, Debra. "Month One: The What, Why and How of Tax Planning with Holistiplan." Zoom Video Communications, 19 Jan. 2023, https://us02web.zoom.us/w/83153809893tk=83QiuhOH3cntElx6Q4TZlNj4SmituUOFtrp3rQ7g0Fo.DQMAAAATXFpx5RYwU3hQYjdWYlMxU25KdHlheTV0Vkh3AAAAAAAAAAAAAAAAAAAAAAAAAAAAAA.
About the Author: Milt Fullen is a CPA and CFP® fee-only fiduciary advisor with more than 30 years of experience in the financial services industry. He is a multi-year winner of Columbus Monthly’s Five Star Wealth Manager Award, and Fullen Financial Group ranks among Columbus Business First’s top fee-only financial planning firms in Central Ohio. We have helped over 200 individuals and families prepare for retirement, and we manage more than $180 million of assets on behalf of our clients. Our team of professional advisors has a wealth of experience and the best credentials in the industry, supported by the latest technology tools and a dedicated client service team.
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